3 Firms Debut ETFs

November 01, 2017

FormulaFolios Adds 2 Funds To Lineup

FormulaFolios is expanding its offering to four ETFs with the launch of two more funds. The FormulaFolios Smart Growth ETF (FFSG) and FormulaFolios Tactical Growth ETF (FFTG), like their previous launches, are ETFs-of-ETFs that are actively managed but rely on quantitative algorithms to determine their portfolios. FFSG comes with an expense ratio of 0.71%, while FFTG charges 1.00%.

FFSG is a growth-oriented fund with a built-in hedge. It allocates 50% of its portfolio to growth ETFs that is rebalanced annually, and the other 50% is determined by market signals on a monthly basis. When the multi-indicator model suggests a long-term bullish trend, the fund allocates to the same equity basket as the first half of the portfolio.

However, when the model suggests a bearish trend, the fund allocates that half of the portfolio to Treasury bonds or other cash equivalent investments. The second half of the fund rebalances monthly, the prospectus says.

According to Derek Prusa, senior market analyst at FormulaFolios, the firm uses a wide variety of indicators to anticipate the direction of the overall market, including technical, fundamental, economic and market sentiment.

“As long as the majority of the indicators are pointing in a positive direction, it’s going to maintain that 100% growth orientation. If enough of the indicators reach a negative or downward-pointing signal, then it will go ahead and sell 50% of the growth holdings,” he said. “We only expect it to trigger in extremely negative economic circumstances, which is why we use so many different indicators.”

FFTG is also growth-oriented. On a monthly basis, it ranks five major asset classes based on price momentum. The asset classes include U.S. stocks, non-U.S. developed-country stocks, real estate, gold and U.S. aggregate bonds.

The fund’s managers select the three highest-ranked asset classes for the portfolio, equal-weights those three asset classes, and excludes the two remaining asset classes. However, if an asset class does not display positive momentum, it cannot be selected for inclusion, and is instead replaced by short-term Treasury bonds.

“The objective is really to gain exposure to the best-performing asset classes based on price momentum and risk/return characteristics, and things of that nature,” Prusa said.

All of FormulaFolios’ ETFs are actively managed funds that rely on algorithms.

“We’ve done a lot of research and academic studies and tried to find indicators that really drive the markets and drive prices. We’re not trying to do anything super-high-frequency, which you might think of when you hear about algorithms and formulas,” Prusa said. “Our goal is to catch the broad market trends and invest in the assets and asset classes that have the long-term risk/return potential relative to others.”

Contact Heather Bell at [email protected]


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