Three firms are rolling out ETFs on the Cboe Global Markets exchange on Wednesday. Exponential ETFs, Aptus Capital Advisors and FormulaFolios are all launching funds.
Cboe Global Markets is the parent company of ETF.com.
Exponential’s Reverse-Weighted ETF
The ETF issuer headed by Phil Bak is unveiling a first-of-its-kind ETF today with the launch of its Reverse Cap Weighted U.S. Large Cap ETF (RVRS), which comes with an expense ratio of 0.29%. The fund’s methodology reweights the components of the S&P 500 Index by the inverse of their respective market capitalizations.
That means the largest components in the parent index will have the lowest weights in RVRS’ underlying benchmark, with the parent index’s smallest components given the highest weightings in the ETF’s index. In other words, Apple will see its nearly 4% weighting in the S&P 500 reduced to a single basis point in RVRS.
“It’s an investment that provides an alpha-seeking exposure to the S&P 500. It’s a factor bet—you’re betting on small-minus-big, which is one of the Fama-French factors, which historically does outperform large-cap or cap-weighted,” said Exponential CEO Phil Bak.
“As a complement to an existing portfolio, it addresses a few fundamental issues with market-cap weighting that we think investors are ignoring. Conventional wisdom is that by investing in a market-cap-weighted broad index, you’re getting full market representation and you’re fully diversified,” he added. “But in reality, what you end up with is a very highly concentrated portfolio that is extremely highly correlated to the momentum factor.”
With cap weighting, Bak points out that investors are constantly “buying high.” RVRS’s strategy dilutes the impact of mega-caps and reduces the momentum effect common in cap-weighted indexes.
Aptus Capital Debuts BEMO Follow-Up
More than a year after the launch of its first fund, Aptus Capital Advisors is rolling out its second ETF. The Aptus Fortified Value ETF (FTVA) comes with an expense ratio of 0.79%.
Aptus rolled out the Aptus Behavioral Momentum ETF (BEMO) in June 2016. The flagship fund currently has roughly $40 million in assets under management.
“BEMO delivers on momentum, with a trend-following overlay. FTVA is a value-oriented fund that mixes some value and quality components, with a tail hedge overlay,” said JD Gardner, founder and managing partner of Aptus Capital. “The underlying baskets work well together, and then you’ve got different forms of risk management. We think this environment calls for that type of approach rather than just buy-and-hold.”
He notes that Aptus was running both strategies in separately managed account wrappers before launching them as ETFs. BEMO and FTVA, in particular, can serve as complements.
“When we talk about allocation to an overall portfolio, the combination of these two funds together should enhance an investor’s ability to stick with something from point A to point B, mainly because you should have something in place that could help minimize drawdown,” Gardner added.
FTVA tracks an index that pairs exposure to value stocks with a tail hedge. The equity component of the index covers the 50 most undervalued stocks and REITs in the Solactive US Large & Mid Cap Index, which it selects via a composite score that takes into account free cash flow relative to size, return on capital employed, and the change in price-to-earnings ratio over a five-year period.
The tail hedge comes into play when the market’s Q ratio signals that the market is overvalued by rising above its historical median. The index methodology evaluates the market’s status on a monthly basis, and the hedge remains in place for the entire month, once it is applied. The hedge is essentially a long put on a broad U.S. market ETF that equates to 0.50% of the index’s total weight.
“We’re trying to deliver U.S. stock market exposure that can be stuck with, and a big part of that’s obviously minimizing drawdown. One form is trend following that looks good in one environment, and one form is tail hedging that looks good in another,” said Gardner. “Our tail hedge is designed to not only minimize drawdown, but to create capital that can be deployed at the most opportune time.”
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]