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These new ETFs put unique twist on risk control

For years, investors who rely on diversification across asset classes as the source of risk management have been relatively well served. What investors haven't been thinking about as much is how to manage risk at the "last mile" in each of the individual asset classes within their portfolios.

Many investors own either the "market portfolio," which is a passive portfolio weighted by the size or capitalization of companies, or they own an actively managed portfolio that is similarly benchmarked.

But investors may not be aware that these simple, low-cost approaches introduce concentration and other risk distortions in their portfolios.

ETF provider Lattice Strategies has developed what founder Ted Lucas, a 26-year industry veteran, terms an "upside-down" philosophy on risk and return.

Lattice recently introduced ETFs the firm calls "risk-first ETFs." The firm seeks to deliver capital growth by focusing on how to "deliberately and intentionally allocate risk." The inaugural ETFs include Lattice Emerging Markets Strategy ETFROAM, -0.08% , Lattice Developed Markets (ex-U.S.) Strategy ETF RODM, -1.75% and Lattice U.S. Equity Strategy ETF ROUS, -0.44% .

"All too often, risk allocation is the consequence rather than the driving force behind portfolio composition," Lucas says. "This can lead to inferior long-term growth potential and it undermines the most fundamental goal of investing — meaningful return."

Here's what Lattice believes makes their ETFs distinct:The products address the "unintentional and inefficient risk allocation" that results from capitalization-driven weighting in benchmark indexes.

"The majority of capital — and risk — is inefficiently allocated to larger, more developed emerging economies, leaving a relative sliver of capital to access the more compelling long-term opportunity in 'true' emerging markets," Lucas said.

For investors who believe that growth could come from a wider array of emerging economies, they might put ROAM, which balances risk across such countries and companies, on their watch list. It increases exposure to smaller, more locally driven emerging economies that are difficult to access for most investors. The ETF tracks the Lattice Risk-Optimized Advancing Markets Strategy Index.

Dave Fry