Understanding risk is the key to smart investing. That’s why we don’t just slap a generic label on an ETF. Our AI-assisted ratings dig deep to give you a clear, honest look at the risks involved in any fund. We go beyond the obvious to help you find investments that truly fit your financial goals and how much risk you're comfortable with.
Our approach is simple: risk isn't a single number. It's a combination of factors. Our AI looks at every ETF from three key angles to build a complete picture. The final rating is our expert judgment based on how these factors interact (and some contextual info).
How We Look at Risk: Our Three-Part Framework
Our AI sifts through hundreds of data points for every ETF, sorting them into three main categories. This way, we know we're not missing anything important.
A Quick Word on 'Risk Velocity'
Before we get into the pillars, let's talk about speed. Two ETFs can both be 'High' risk, but one might drift down while the other could drop off a cliff. We call this risk velocity—how fast you could lose money. Things like daily leverage or a fund betting on narrow outcomes can seriously crank up the velocity. Our ratings consider not just if you could lose money, but how quickly it could happen.
Part 1: The ETF's Blueprint (Structural Risk)
First, we look at the ETF's DNA. Some funds are built in ways that are inherently risky, no matter what they hold.
- Leverage & Inverse Plays: We're talking about funds that use financial tools to juice up returns (like 2x or 3x) or bet against the market. These can deliver big gains, but they can also lead to massive, fast losses, especially if you hold on for too long.
- ETN Credit Risk: Unlike a typical ETF, an Exchange-Traded Note (ETN) is basically an IOU from a bank. We check the bank's financial health, because if it goes under, your investment could too.
- Single-Stock Bets: ETFs that are designed to track just one stock are the definition of putting all your eggs in one basket. We flag these for their wild potential swings.
Part 2: The Game Plan (Strategy & Complexity Risk)
Next, we look at how the fund is managed. A complicated or aggressive strategy can hide risks that aren't obvious at first glance.
- Use of Derivatives: We check how the fund uses things like options and futures. Are they for protection, or are they making complex bets that could backfire in weird ways?
- "Black Box" Strategies: We're cautious about funds run by secret, proprietary models. If you can't understand how investment decisions are made, it's tough to know how the fund will react in a crisis. All else being equal, the Black Box strategies will drift higher in the risk rating.
- Aggressive Active Management: For actively managed funds, we take into account the expected portfolio turnover.
- "Buffer" ETFs: Funds that protect you from some losses but also cap your gains have a unique trade-off. We run the basic scenario analysis to see how they might perform when markets get choppy.
Part 3: What's Inside (Concentration & Asset Risk)
Finally, we look at the actual assets the ETF holds. The volatility of what's in the portfolio is a huge piece of the puzzle.
- Diversification: This one is faily obvious. Higher diversification generally corresond with lower risk.
- Narrow Focus: Risk gets higher the more specialized a fund is. A broad market fund is less risky than a tech sector fund, which is less risky than a cybersecurity fund, which is less risky than a fund focused on one specific AI technology.
- Volatile Assets: We put a higher risk weight on funds holding things that are naturally volatile, like crypto, commodities, currencies, or junk bonds. Conversely, lower risk weight on the funds that are exposed to less volatile assets.
The Tie-Breakers
While those three pillars are the main event, our AI also looks for other clues. If a fund is right on the line between two ratings, we might look at these secondary factors to make the final call:
- The issuer's reputation and track record.
- How long the fund and its managers have been around.
- The fund's size and how easily it trades.
To be clear, these are just tie-breakers. They have much less impact than the three main pillars, but they help us add that final touch of human-like judgment.
Our Five Risk Levels
After looking at everything, our AI assigns one of five straightforward risk ratings.
- Low: The foundation of a portfolio. Think broad, passive funds holding big-name stocks or high-quality bonds. No leverage or fancy derivatives here.
- Medium: A clear step up in risk from a basic index fund. This includes funds focused on a single, diversified sector (like technology) or a single developed country (like Japan).
- High: Here you'll find funds concentrated in a narrow theme (like biotech) or a volatile sector. Also includes funds that aren't diversified or use options aggressively.
- Very High: This is where you find moderate leverage (like 1.5x), inverse funds, or ETNs with significant credit risk. Funds with very complex strategies or a heavy dose of crypto also land here.
- Extreme: For products with the highest chance of a quick, massive loss. This means ETFs with 2x or more leverage, inverse leveraged funds, or those tied to a single stock.
We're committed to being transparent about how we rate risk. Our goal is to give you the confidence and clarity you need to pick investments that are right for you.
If you can spot any room to improve this, please reach out to us [email protected] (perhaps with your CV!)