In a recent episode of “Behind the Ticker,” Yang Tang, co-founder of Arch Indices, discusses his career journey and the innovative approach his firm takes in constructing investment portfolios. With a background in commodity sales and macro solutions at major financial institutions like Barclays, Morgan Stanley, and Citi, Tang brings a wealth of experience to Arch Indices. The firm, founded in August 2022, aims to build better portfolios through a unique methodology focused on risk-adjusted contributions, departing from traditional market cap or equal-weighted strategies.
About Yang Tang and Arch Indicies
Tang explains the core principles behind Arch Indices’ approach, which revolves around variance optimization, a concept rooted in modern portfolio theory. This methodology emphasizes creating portfolios that achieve specific investment goals, such as income generation or total return, with the least amount of volatility. Unlike traditional methods that rely on expected returns, Arch Indices uses market-observed volatility and correlation to dynamically adjust portfolios. Their recursive optimization technique further refines this process, continually adjusting asset allocations to maximize returns while minimizing risk.
Investment Strategy and Approach
One of the standout products from Arch Indices is their ETF, VWI (Arch Indices Income ETF), which combines dividend-paying stocks and bond ETFs to deliver high income with low volatility. The ETF aims to provide investors with the highest possible income while minimizing fluctuations in portfolio value. Tang highlights the dynamic nature of the ETF, which rebalances quarterly to adapt to changing market conditions, ensuring that the portfolio remains optimized for both yield and risk. This approach allows the ETF to maintain a high yield, typically around 6.8%, while keeping volatility low.
Tang discusses the practical applications of the VWI ETF for different types of investors. He notes that the ETF is particularly well-suited for retirement-focused advisors and individuals, offering a stable income stream with lower volatility, which is crucial for managing sequence of returns risk in retirement planning. Additionally, the ETF can serve as a core holding within a broader portfolio, providing a foundation of income and stability while allowing for the inclusion of other growth-oriented assets. Tang also mentions that Arch Indices offers the strategy through SMAs via a partnership with Quorus, catering to clients who prefer a more tailored approach.
Portfolio Construction and Implementation
Overall, Tang emphasizes the importance of staying invested and managing risk effectively, particularly in volatile markets. The VWI ETF and Arch Indices’ broader strategy provide a robust solution for investors seeking to balance income generation with risk management. The firm’s innovative approach to portfolio construction, rooted in rigorous mathematical optimization, sets it apart in the competitive ETF landscape.
Deeper Dive: Insights from the Full Conversation
Beyond the headline strategy, the full conversation between Brad and Yang Tang covered several additional themes worth highlighting for advisors and investors.
On Process and Philosophy
I'm Brad Roth, Chief Investment Officer of Thor Financial Technologies, and portfolio manager of THLV, the Thor Low Volatility ETF. Behind the Ticker, uncovers the inner workings of the ETF industry. We will interview portfolio managers and ETF service providers to dive deep into their work lives and their businesses. We will learn the inner workings of their strategies and what drives them as they continue to grow their company. Many of these individuals are entrepreneurs, and will have unique and compelling insights to share as much goes on behind the Ticker.
And the genesis of what we do is pretty much all pass the portfolios out there, are either market cap or, and if you think about this, historically market cap was actually negative, I factor, right? If you look at that to research, small caps are thrown out perform large caps over a long period of times. Of course, the last 70 years is not a good example of that, but nonetheless, the way people try to correct for that is to look at people.
Market Context and Positioning
So what you want is you want a lot of assets that have extremely high yield relative to its underlying volatility. So that doesn't mean that you want 26% dividend pay stocks, right? You want say something that has high yield, but also extremely low volatility. And the second is the second layer of defense is looking for assets that don't move together. So of the 600 available stocks, I'm going to need to get a moment on the low end.
So in that may reap balance as an interesting point, it's almost 50% between bond ETFs and BDCs. And that's actually quite noticeable because number one, correlation between stocks and bonds have been dropped in all year, and bond volatility actually declined by after. Whereas if you look at kind of our October rebalance last year, even though yields on 30 year bonds probably hit gosh decade high in October, it actually did increase its allocation to bond ETFs. So, because that increase in yield came with an increase in volatility.
So we try to, yes, close to the, you know, I guess the broad investment bond index for dollars. So it's going to be, you know, the different duration sectors of both ICHE corporates as well as US government bonds. We do have AAA CLOs. So yes, we do have security as product exposure. We have mortgage back exposure as well. So we only have actually eight or nine bond ETFs in the moment. And then we try to, we just try to capture as much of the dollar bond investment universe as we can from a pure sector approach.
Notable Insights
"If you bought in March and then you went through probably three more phases of volatility over the summer of 2020, 2021, you know, probably the biggest debt hike."
Key Takeaways
- The firm, founded in August 2022, aims to build better portfolios through a unique methodology focused on risk-adjusted contributions, departing from traditional market cap or equal-weighted strategies.
- This methodology emphasizes creating portfolios that achieve specific investment goals, such as income generation or total return, with the least amount of volatility.
- One of the standout products from Arch Indices is their ETF, VWI (Arch Indices Income ETF), which combines dividend-paying stocks and bond ETFs to deliver high income with low volatility.
- The ETF aims to provide investors with the highest possible income while minimizing fluctuations in portfolio value.
- This approach allows the ETF to maintain a high yield, typically around 6.8%, while keeping volatility low.
- Tang also mentions that Arch Indices offers the strategy through SMAs via a partnership with Quorus, catering to clients who prefer a more tailored approach.
What This Means for Advisors
For financial advisors evaluating options for client portfolios, this conversation with Yang Tang highlights important considerations around fixed income. Understanding the strategy behind each fund—not just the ticker—helps advisors make more informed allocation decisions and better communicate the rationale to clients.
The themes of fixed income and income investing discussed in this episode are particularly relevant in the current market environment, where advisors are increasingly looking for differentiated solutions that go beyond traditional benchmarks.
Listen to the Full Episode
This article is based on an episode of Behind the Ticker, hosted by Brad Roth, Founder and CIO of THOR Financial Technologies. For the full conversation with Yang Tang, including additional nuances and details, listen on Spotify, Apple Podcasts, or watch on YouTube.