Arch Indices Partners With Quorus To Provide Indexing

Index And ETF Provider Sees Shortcomings In Passive And Active Approaches, CEO Discusses Methodology And Future Plans
Julius Buchanan, Editor in Chief, Wealth Solutions Report
Julius Buchanan, Editor in Chief, Wealth Solutions Report

Index and ETF provider Arch Indices and advisory firm Quorus announced a partnership in which Quorus will offer Arch’s Variance Optimized Indexing (VOI) indexes in personalized, tax-managed accounts, to provide advisors with VOI indexes when generating tax-alpha and personalizing accounts for clients.

The first index offered through Quorus is the VOI Core Absolute Income Index, which comprises bond ETFs and dividend stocks weighted to maximize income and minimize volatility. VOI indexes are designed to account for both individual asset volatility and cross-asset covariance, with a goal of reducing overall risk and volatility. Minimized volatility is intended to provide liquidity when the markets seek to reduce risk by reducing drawdowns. In October, Arch announced the launch of the VOI Absolute Income ETF based on the same methodology.

John Hill, CEO of Quorus, said, “The Arch team has developed a thoughtful series of strategies that capture something entirely new when it comes to portfolio construction and optimization, and we ensure that any advisor who uses these strategies will also gain the benefits of our next-gen approach to direct indexing.”

Drawbacks Of Passive Investing

John Hill, CEO, Quorus
John Hill, CEO, Quorus

“We believe that traditional passive indexing approaches do not meet the needs of today’s investors, and the Quorus team is similarly focused on providing solutions for advisors that go well beyond traditional direct indexing, said Yang Tang, CEO of Arch Indices. “Being able to combine our optimized indices with the potential benefits of tax-loss harvesting inherent in the Quorus approach makes this an ideal pairing and one we are very excited to discuss with the full range of financial advisors.”

Tang added, “At their core, traditional means of weighting passive portfolios, whether by market capitalization, equal weight, inverse rank, and so on, are arbitrary in their approach and in the exposures they provide. Investors are essentially given baskets of assets selected because they fit a certain description, with little to no consideration given to how the assets in that basket may interact with, or counteract, one another.”

Problems With Active Investing And Modern Portfolio Theory

Yang Tang, CEO, Arch Indices
Yang Tang, CEO, Arch Indices

Tang told WSR that while passive portfolios run risks because of arbitrariness, active investing is subject to human error and emotion in decision-making. “Active investing is overpriced and doesn’t work. As much as 95% of active fund managers underperform their benchmark over a 20-year period. As much as people like to talk about Warren Buffett, Berkshire has underperformed the S&P over the last decade.”

Furthermore, modern portfolio theory is flawed in his view. “It’s based on the assumption that you can predict expected returns, you can predict expected volatility, and that returns are normally distributed. That’s why a lot of optimizations in the past have failed.”

Tang describes the methodology of VOI as passive, but in a different way than what’s been available in wealth management previously. “Everything is done with as much systematic processing as possible.”

An Approach Used By Hedge Funds

The Citadels and Millenniums of the world have adopted our approach,” he explains. “Citadel has 80 to 100 pods, and all generate alpha, but not all generate alpha on the same day. That’s how they smooth out their returns. We take a similar philosophy – high output assets that don’t move together.”

“As much as 95% of active fund managers underperform their benchmark over a 20-year period.”

Yang Tang

While this approach is currently used in hedge funds, Tang views the approach as unique to the wealth management industry.

The firm’s upcoming plans for 2024 include a personalized portfolio engine that can back test and optimize unique proposed portfolios that it anticipates rolling out midyear, building more analytics into its methodology and creating index formats containing additional investing factors in the next few months.

Julius Buchanan, Editor in Chief at Wealth Solutions Report, can be reached at jbuchanan@wealthsolutionsreport.com.

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