MarketGrader 100 Index


The MarketGrader Risk-Managed 100 Index (ticker: KZTMGO) combines MarketGrader's flagship MarketGrader 100 Index (ticker: MGONE) with the Kaizen Dynamic Risk Overlay Index (ticker: KZTVOL). Its objective is to provide investors with a measure of the capital appreciation opportunity in U.S. equities while minimizing the negative impact of bear markets.


How Does the Index Works

During periods of significant downward pressure on U.S. stocks, the Dynamic Risk Overlay triggers a signal that allocates 30% of the value in the underlying MarketGrader 100 Index to certain VIX futures contracts. This signal is based on a rules-based hedging technique that is automatically triggered under certain conditions common to past systemic events. This proprietary process is governed by market volatility, using the VIX (CBOE SPX Volatility Index) and associated measures of stress to gauge the drawdown potential in equities. As volatility rises and market stress accelerates, the VIX futures allocated to the 30% value of the index increase in price as participants rush to hedge risk, typically providing uncorrelated returns with equities. In this manner, VIX futures act as catastrophe insurance, paying out when equities experience prolonged drops or volatility.

Unlike other indexes designed to manage downside risk, the MarketGrader Risk-Managed 100 Index never sells or shorts the underlying companies in the MarketGrader 100 Index; it is always long equities, decreasing the risk, cost and tracking error of other hedging techniques. As measured by price returns on the VIX futures, the Dynamic Risk Overlay signal provides a positive return in roughly half the instances the hedge is applied. The performance drag on the index in times of false stress signals, when VIX futures prices drop, is a fraction of their positive contribution when VIX futures rise.

This replicable, systematic, rules-based process delivers an effective hedge that is only applied tactically. Based on historical conditions since April 2004* the hedge has been activated 5% of trading days and about one quarter of months on an annualized basis. During normal market conditions the hedge is not activated, allowing the proven strength of MarketGrader's growth-at-a-reasonable-price (GARP) selection methodology to fully drive performance.



Cumulative Performance
MG 100 Risk-Managed Performance
*Chart Data as of: Dec. 29, 2017


Calendar Year Returns
KZTMGO MG100 R3000 S&P500
2017 26.37% 26.59% 18.85% 19.42%
2016 1.50% 8.33% 10.41% 9.54%
2015 -11.91% -6.51% -1.47% -0.73%
2014 4.00% 8.54% 10.45% 11.39%
2013 42.66% 41.57% 30.95% 29.60%
2012 17.20% 16.60% 13.98% 13.41%
2011 17.40% -0.59% -0.92% 0.00%
2010 19.41% 19.16% 14.75% 12.78%
2009 40.51% 40.86% 25.46% 23.45%
2008 -7.23% -45.53% -38.70% -38.49%
2007 32.31% 14.04% 3.30% 3.53%
2006 6.61% 6.15% 13.66% 13.62%
2005 18.50% 18.50% 4.28% 3.00%
Sources: Bloomberg, FactSet, MarketGrader.com
Annualized Returns
KZTMGO MG100 R3000 S&P500
3-Years -4.50% 5.20% 8.20% 8.60%
5 -Years 4.90% 12.00% 10.80% 11.00%
Since 04/’04 13.20% 9.00% 6.60% 6.30%
Cumulative Returns
KZTMGO MG100 R3000 S&P500
3-Years -13.00% 16.50% 26.80% 28.10%
5 -Years 27.10% 75.90% 67.30% 68.30%
Since 04/’04 468.20% 233.10% 144.00% 134.50%
Standard Deviation
KZTMGO MG100 R3000 S&P500
3-Years 15.84% 13.20% 10.36% 10.30%
5 -Years 14.36% 12.54% 9.89% 9.75%
Since 04/’04 18.11% 18.47% 13.88% 13.41%
Sharpe Ratio
KZTMGO MG100 R3000 S&P500
3-Years -0.28 0.39 0.79 0.83
5 -Years 0.34 0.96 1.09 1.13
Since 04/’04 0.73 0.49 0.48 0.47
All data as of Mar. 29, 2018. Frequency: Monthly. Sources: Bloomberg, FactSet, MarketGrader.com

Results
  1. Smaller drawdowns during bear markets and substantial upside capture during normal and bull market conditions.
  2. Improved risk-adjusted returns.

For more information on the mechanics of the Dynamic Risk Overlay, see the MG Risk-Managed Indexes page.



*The Dynamic Risk Overlay's based date is April 1, 2004. All figures between that date and 10/01/2015, when the index was first officially calculated by the New York Stock Exchange are based on back-tested results.

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