The alternative to using a mutual fund would be to use a separately managed account, which means to trade the ETFs that represent the Risk Parity portfolio directly in your portfolio. A separately managed account approach to implementing Risk parity is not ideal for several reasons:
- It would negatively impact the benefit of ETF level tax-loss harvesting. Due to limitations imposed by the wash sale rule, frequent trading of the ETFs that would comprise the Risk Parity portfolio would likely limit the frequency of tax-loss harvesting transactions that could be performed on the similar ETFs that comprise the remainder of your diversified portfolio. This would lead to fewer harvested losses that could be applied to lower your taxes.
- It would limit your ability to borrow against the value of your account using our Portfolio Line of Credit service. Borrowing money to directly implement Risk Parity would severely limit the amount of money available to borrow against the rest of your account value due to margin lending restrictions.
- It would limit the amount that could be borrowed to implement Risk Parity. It would not be possible to leverage a separately managed account up to 3x given the limitations of Reg T. We believe that lowering the leverage applied to implement the risk parity strategy would likely result in lower returns.
- It would not be possible to offer to a broad set of clients. Without a very large balance sheet, it would not be possible to borrow enough money in aggregate to serve a broad audience. Using a mutual fund allows us to take advantage of economies of scale in obtaining leverage.
These deficiencies of a separately managed account implementation are addressed by offering Risk Parity as a mutual fund.
The Wealthfront Risk Parity Fund (the “Fund”) is managed by Wealthfront Strategies LLC (formerly known as WFAS LLC), a registered investment adviser and a wholly owned subsidiary of Wealthfront Inc. Wealthfront Strategies LLC receives an annual management fee equal to 0.25% of the Fund’s average daily net assets. Northern Lights Distributors, LLC, a member of FINRA and SIPC, serves as the principal distributor for the Fund. Wealthfront Inc., is not affiliated with Northern Lights Distributors, LLC.
Before investing in the Wealthfront Risk Parity Fund, you should carefully consider the Fund's investment objectives, risks, fees and expenses. This and other information can be found in the Fund’s prospectus. Please read the fund prospectus or summary prospectus carefully before investing. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses.
In order to add the Wealthfront Risk Parity Fund, we must rebalance your portfolio. As part of this process, if we sell positions at a gain, and you do not have sufficient harvested losses to offset those gains, you’ll pay taxes on the net gain.