ETF Watch: Trend-Following Factor Fund Debuts

May 03, 2017

Today Alpha Architect is rolling out an ETF that will invest in the firm’s other ETFs. The Alpha Architect Value Momentum Trend ETF (VMOT) looks to capture the performance of the value and momentum factors in developed markets.

VMOT comes with an expense ratio of 0.79% and is listed on the Bats exchange. Bats is owned by ETF.com’s parent company, CBOE.

Alpha Architect offers four other ETFs that individually target the value and momentum factors in domestic and non-U.S. stocks via equal-weighted indexes; they have a combined total of more than $180 million in assets under management. Those products will be the holdings in VMOT’s portfolio.

VMOT’s index uses an approach based on risk parity to determine its allocations to each of the four ETFs. That means it seeks to distribute risk evenly across the funds rather than equal-weighting them or weighting them by capitalization or some other approach. The aim is to achieve a portfolio with lower volatility and risk levels. As of March 1, according to the prospectus, the allocations were as follows: 22.27% in the ValueShares U.S. Quantitative Value ETF (QVAL); 25.33% in the ValueShares International Quantitative Value ETF (IVAL); 24.79% in the MomentumShares U.S. Quantitative Momentum ETF (QMOM); and 27.61% in the MomentumShares International Quantitative Momentum ETF (IMOM).

“We do really concentrated factor portfolios, specifically on value stocks and on momentum stocks,” said Wesley Gray, CEO and chief investment officer of Alpha Architect. “Value and momentum are kind of like yin and yang in the sense that, if you want diversification, those are the two factor anomalies where, if you want to pull something together, that makes sense.”

A 3-Part Strategy

According to Gray, the three key elements of VMOT are the value and momentum factors and the trend-following factor, which is incorporated via its capacity to hedge its exposures.

The fund can hedge its exposure via a shorting strategy when the index’s models indicate that markets are trending downward, the prospectus says. When the U.S. equity market underperforms the U.S. Treasury bill over a rolling 12-month period, the fund will hedge 50% of the portfolio. It will do the same when the market’s 12-month moving average is higher than current prices. If both conditions are fulfilled at the same time, the prospectus notes that the fund will be fully hedged.

Essentially, VMOT offers exposure to concentrated value and concentrated momentum, “and then we’re going to try to protect you from total chaos with a trend-following element,” Gray said. “When technicals start breaking down, we want to start layering in the hedge where you may not want to be exposed to equity risk anymore. This is kind of a one-stop shop.” 

Although the hedge is updated monthly, the fund’s allocations are reconstituted annually. The indexes for the component funds are rebalanced on a quarterly or semiannual basis, according to Gray, who likens VMOT to AQR’s long/short equity fund, but in a cheaper and more tax-efficient wrapper, with an easier-to-understand approach.

Direxion Adds More 3X Leveraged ETFs

Direxion has added another five ETFs offering 300% of the daily return of their underlying indexes. The five funds cover Mexico’s market and four key industries. The funds and their expense ratios are as follows:

The five funds are listed on the NYSE Arca. 

Contact Heather Bell at [email protected].

 

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