All the reported changes have been made in accordance with applicable securities laws
Three firms have announced risk-rating reductions for certain members of their ETF lineup.
On July 30, Horizons ETFs adjusted the risk rating for its Horizons Conservative TRI ETF Portfolio (HCON) from “Low to Medium” to “Low”. On the same day, it changed the rating for the Horizons Balanced TRI ETF Portfolio (HBAL) from “Medium” to “Low to Medium”.
Meanwhile, Hamilton Capital Partners, which has rebranded as Hamilton ETFs to reflect its commitment to the exchange-traded fund structure, announced that the Hamilton Global Financials Yield ETF (HFY) will see its risk rating change from “Medium” to “Low to Medium” on or about August 7. Simultaneously, the Hamilton Australian Financials Yield ETF (HFA) will undergo a risk-rating change from “Medium to High” to “Medium.”
WisdomTree Asset Management Canada has also telegraphed an update to the investment risk rating of its ONE Global Equity ETF (ONEQ) from “Medium” to “Low to Medium”, which will be reflected in an updated prospectus to be filed on or around August 13.
The downward adjustments in ETF risk ratings are in accordance with a standardized risk classification methodology in National Instrument 81-102 Investment Funds, which also applies to mutual funds and seg funds. An ETF’s historical volatility, as measured by the 10-year standard deviation of its returns, is used to determine where it falls within a five-category system set out by Canadian securities regulators.
For an ETF with less than 10 years of performance history, the investment risk level is determined using its return history and, for the remainder of the obligatory 10-year period, the return history of a reference index that is expected to reasonably approximate the standard deviation of the ETF.
The risk-rating methodology was recently questioned by investor advocates. In an investor alert, Kenmar Associates highlighted the fact that the 2008 financial crisis has effectively vanished from the 10-year history that fund manufacturers are required to abide by. That, the note contended, is leading to risk ratings that are “incomplete and inappropriate” as well as “misleading”.
While fund managers are allowed to exercise upward discretion — essentially ignoring a calculation of lower risk if they feel it does not appropriately reflect actual risk — Kenmar argued that the voluntary nature of the decision leads to inconsistencies in risk ratings across similar funds from different managers.