New Active ETF Has AI Twist

April 04, 2018

Today a newcomer to the ETF space, Little Harbor Advisors, has launched an actively managed fund with an artificial intelligence element. The LHA Market State U.S. Tactical ETF (MSUS) invests mainly in a combination of large-cap U.S. equity ETFs and long and short futures contracts.

MSUS has an expense ratio of 1.25% and lists on Cboe Global Markets, the parent company of ETF.com.

Although actively managed, the fund is built around the concept of the LHA Market State Tactical U.S Equity Index, which seek to adjust exposure to the market in such a way as to limit downside and amplify upside participation in the U.S. market.

“The objective is to outperform large-cap U.S. equities on a risk adjusted basis,” said Jeff Landle, Little Harbor’s chief investment officer and the portfolio manager for MSUS. “The concept is really built around the idea that if you want to maximize total returns, it’s not necessarily done by making a whole lot more when the market’s going up but probably, more importantly, to lose less when the market is going down.”

“Our goal by modulating the overall exposure is to cushion the drawdowns while still providing a meaningful amount of upside participation while the market’s going up,” he noted.

Adding In AI

And according to the prospectus, on a daily basis, the fund’s managers using analysis of the distribution of prices of U.S. equities determines what exposure the fund should have to U.S. equities, ranging from none at all to 160%. It adjusts exposure to a portfolio of one or more U.S. large-cap equity ETFs using long and short futures contracts.

The analysis of the distribution of returns is where the artificial intelligence-driven proprietary technology comes in. It’s used to determine the likely direction of the market on the following day and what adjustments need to be made to the portfolio.

“Our technology basically looks at today’s price relative to its estimated distribution, and if that price is consistent with the estimated distribution, it doesn’t do very much. If it’s inconsistent, it tends to be more aggressive, either long or short,” Landle said.

“Daily prices tend to be pretty noisy and don’t necessarily have a great amount of usable information, but if properly processed, you can extract a reasonably powerful signal-to-noise ratio,” he added.

Landle notes MSUS currently holds just one ETF, the VictoryShares U.S. 500 Volatility Wtd Index Fund (CFA), a volatility-weighted portfolio of the 500 largest U.S. stocks. It was selected from the universe of large-cap U.S. equity ETFs based on its risk characteristics, liquidity and size, among other criteria.  

New Leveraged Large-Cap ETN

It appears that Fisher Investments is behind the launch of yet another ETN. The Large Cap Growth Index-Linked ETN (FRLG) is issued and guaranteed by Goldman Sachs.

The ETN lists on the NYSE Arca and comes with a total expense ratio of 1.46%, though since part of that is based on net asset value, it could work out to more.

The product offers leveraged 2x exposure to the Russell 1000 Index, with quarterly rebalancing. Although FRLG does not carry any indication in its name that Fisher Investments was behind its launch, it is very similar to other ETNs the firm has backed as bespoke products. The investment management firm has several leveraged ETNs on the market that it uses in its in-house strategies launched by a variety of issuers, including UBS, Credit Suisse, Deutsche Bank and Barclays.

Contact Heather Bell at [email protected]

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