What is an ETF?

Risk Control Indicator

Update : Oct. 29, 2012

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1. What is a Risk Control Indicator?

A Risk Control Indicator is an index expressing income from an investment strategy which reduces deviations in income by adjusting cash holding ratio of an investment portfolio tracking a certain indicator (hereinafter "underlying indicator") as needed, according to certain standards.
This type of indicator is generally a type of Enhanced Indicator (an index which expresses an investment strategy pursuing certain investment results for a certain investment strategy).

2. Traits of Risk Control Indicators

The following is a specific explanation of the traits of Risk Control Indicators.

(1)Example

Investment portfolios tracking TOPIX (Tokyo Stock Price Index) are composed of the approximately 1,700 issues listed in the TSE 1st Section. In the case of the "TOPIX Risk Control Indicator", which uses TOPIX as an underlying index, the cash portion (interest is reflected) of the portfolio would also be added. Because the cash portion, excluding interest, does not experience price movements, the income deviation (price movement or volatility) of the overall portfolio is suppressed in comparison to a portfolio composed of 100% stock holdings.

Thus, at times when the underlying indicator TOPIX volatility (price movement) is at a maximum, such as large market gains or losses, the TOPIX Risk Control Index is able to suppress volatility to a greater extent than the underlying index by increasing the cash portion of portfolio holdings.

(2) Comparison between Movements of Risk Control Indicator and Underlying Indicator

As displayed in the graph below, when TOPIX is rapidly declining or rising, the TOPIX Risk Control Index does not experience large fluctuations in either direction, demonstrating its comparatively stable price movements.

  • The above graph shows the TOPIX Risk Control Index as of November 1, 2010 paired with TOPIX index values.
  • The underlying index of the TOPIX Risk Control Index is technically the "TOPIX Total Return Index". Additionally, there are 3 types of TOPIX Risk Control Indices for each of the following target volatilities: 5%, 10%, 15%. The above graph displays "TOPIX Risk Control Index (Volatility 5%)".
  • Please refer to the following URL for a detailed explanation of the calculation method used for the TOPIX Risk Control Index: http://www.tse.or.jp/market/topix/calculation.html

3. Differences in Profit/Loss with ETFs tracking Underlying Indicator

When compared to an ETF tracking the underlying indicator, ETFs tracking a Risk Control Indicator hold a cash portion as part of their portfolios, causing smaller daily price movements. Accordingly, profits resulting from gains in the underlying indicator will be smaller than those from the underlying indicator. Additionally, losses resulting from a drop in the underlying indicator will be smaller than those from the underlying indicator.

4. Notes on Investment Styles

Caution is required for cases of short-term investment

While Risk Control Indicators can be expected to reduce losses at times when the market is down, they also limit profits from rises in stock price. (Compared to the underlying indicator, both profit/loss are limited.) Therefore, please be aware that expected results may be difficult to achieve when investing for short-term returns.

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