  We discuss how to build ETF risk models. Our approach anchors on i) first
building a multilevel (non-)binary classification/taxonomy for ETFs, which is
utilized in order to define the risk factors, and ii) then building the risk
models based on these risk factors by utilizing the heterotic risk model
construction of https://ssrn.com/abstract=2600798 (for binary classifications)
or general risk model construction of https://ssrn.com/abstract=2722093 (for
non-binary classifications). We discuss how to build an ETF taxonomy using ETF
constituent data. A multilevel ETF taxonomy can also be constructed by
appropriately augmenting and expanding well-built and granular third-party
single-level ETF groupings.
