Risk Management, Trading & Portfolio Strategies

ETF expert sees major losses due to risk model failures following Fed policy meeting

Risk is surging in global markets following indications that the Fed may withdraw its monetary easing programs.

Risk is surging in global markets following indications that the Fed may withdraw its monetary easing programs.

Anyone with at least half an eye on global markets this week could plainly see how destructive a few potentially misplaced words can be. During a routine press conference following the latest Federal Open Market Committee (FOMC) meeting, Chairman Ben Bernanke discussed how, if at all, the so-called "tapering" of quantitative easing (QE) would take place. He stressed that the first steps would be akin to taking the foot of a gas pedal rather than hitting the brakes in a car. Yet hidden in his words was the stark conclusion: The central bank's expansionary policies will come to an end in the near future.

Rather than diving into a breakdown of the events that followed the presser – namely that global markets began to shed value at an alarming rate – it's important to look at one of the microcosms of what could blossom into a full-blown, Fed-funneled rout. According to the Financial Times, Bryce James, president of an electronic trade future (ETF)-oriented asset allocation model firm, remarked that he had never seen a day so negative for investors in that investment class.

"The losses for ETFs today were far beyond what the most sophisticated financial risk models could have predicated for worst-case scenarios," he remarked. He went on to describe a situation of near-panic among many ETF traders who were unsure of how to process all of the information as it came in.

Investors should read that quote several times and try to understand the full implications. With Fed "tapering" on the horizon, global markets – ETFs in particular – could be heading into wholly uncharted waters that require a nuanced approach. One method worth consideration is the use of SmartStops, a set of online risk management and portfolio management tools. Those who follow their Daily Triggers can see the signs of rising stress and react accordingly before surging volatility becomes a serious concern.

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