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Mutual Fund Manager To Bring Strategies To ETFs

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As stock markets in the U.S. continue to recover following a devastating 18-month bear market, a money manager taking a quantitative approach to investing is planning to bring to market an exchange-traded fund that will track large-cap stocks in the U.S.

The proposed ETF would be called the Nasdaq OMX Industry Leaders Index Fund and would trade under the ticker “LEAD.”

It would track and index using the number-crunching process developed by Claremont Investment Partners. That’s the advisory shop that launched and runs a 10-year-old mutual fund, the Industry Leaders Fund (ILFIX).

The index for the new ETF is expected to launch before the end of 2009, according to Virginia Dawson, chief executive of Claremont. She’ll be portfolio manager of the ETF. The advisory shop was founded by Gerald Sullivan, who devised the firm’s quant-based methodology. Both serve as co-managers of the mutual fund.

The new benchmark for the proposed ETF is expected to hold anywhere from 55-70 names at any given point. That’s about the same range as ILFIX has and appears to follow the same basic strategy.

The mutual fund has a maximum weighting of 2.5% to any single given name. As of the fund’s last reporting period, ended June 30, ILFIX had financials as its top weighting, with more than 20% of its total assets. The next biggest, all in the low teens in terms of percentage weightings, were: industrial materials, energy and health care.

“Basically our process is to start by looking at common shareholder equity on a sector basis,” said Dawson. “We take those factors and compare them to various industry weightings. So we’re looking at fundamentals on an industry level and comparing that to shareholder equity positions.”

A mathematical formula is used to determine the mix and weightings of the fund. ILFIX is rebalanced at the end of each month. The proposed ETF’s underlying index would also be rebalanced monthly.

“Since our mutual fund isn’t technically an index fund, people are always asking us whether we’re an active or passive methodology,” said Dawson. “We consider our strategy a sort of hybrid, taking the best of both strategies.”

She added that the firm’s managers refer to its strategy not as buy-and-hold, but “buy and stay.”

“That means while our names might change, we stay fully invested in the market at all times,” said Dawson.

The new ETF would charge an expense ratio of 0.49%. That would be much less than the 0.83% assessed by ILFIX, although the new version would be in a different structure (i.e., ETF) and be bound by its index—which the mutual fund is not.

You can read the filing here.

 

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