Daily ETF Watch: Arrow Debuts Tactical Fund

Actively managed ETF covers multiple asset classes, invests primarily in other ETFs.

Today, Arrow Funds is rolling out its second ETF. The go-anywhere Arrow DWA Tactical ETF (DWAT) is actively managed and can invest in equity and fixed-income securities and alternative assets, according to its prospectus. However, it invests mainly in other exchange-traded funds, including those covering developed and emerging equity markets and debt securities of any credit quality.

DWAT also invests in commodities futures—which the fund classifies in the alternative bucket—via a wholly owned subsidiary domiciled in the Cayman Islands; the location comes with certain corporate income tax exemptions.

The prospectus notes that the fund can shift its portfolio entirely into equities or fixed income, if necessary, but that it can only invest up to 90 percent of the portfolio in alternative assets. No more than 25 percent of the fund can be invested in the Cayman-based subsidiary.

The fund’s subadvisor is Dorsey, Wright & Associates, and the fund’s strategy is based on the Dorsey Wright Relative Strength Global Macro Model, a press release said. Dorsey Wright uses technical analysis to make investment decisions, with relative strength serving as the primary criteria.

“The relative strength indicator is important because it adapts to the changing market conditions,” the prospectus noted.

Relative strength is used to drive a variety of rotation strategies in DWAT’s portfolio, with the fund buying securities or asset classes with high relative strength rankings and selling the lowest-ranked securities or asset classes.

DWAT would seem to fit in best with other actively managed tactical funds, such as the AdvisorShares Meidell Tactical Advantage ETF (MATH | D-59) and the AdvisorShares Morgan Creek Global Tactical ETF (GTAA). Both funds also invest across a range of asset classes and strategies, but have somewhat paltry assets—less than $25 million under management apiece. It is a portion of the ETF space that struggles to accumulate assets, so DWAT has its work cut out for it.

However, the newcomer undercuts its competitors with an expense ratio of 1.52 percent, slightly below the 1.63 percent charged by MATH and the 1.59 percent charged by GTAA.

Arrow launched its only other fund, the index-based Arrow Dow Jones Global Yield ETF (GYLD), in May 2012, and the fund’s assets under management are approaching $200 million. Interestingly, GYLD is also a multi-asset-class fund, like DWAT, and invests in equities, debt, real estate and alternatives as part of its yield-seeking strategy.

Compass EMP Launches 5th ETF
Compass EMP is adding its fifth volatility-weighted ETF after rolling out its first four funds over the summer.

The Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF (CIZ) covers non-U.S. developed-market stocks. Like the existing Compass EMP funds, it will select its holdings using fundamental criteria—in this case, the 500 largest stocks in the universe with positive earnings for at least the most recent four quarters—and then weight them by volatility, as determined by their standard deviation.

And as with the other “Enhanced” ETFs in the Compass EMP family, CIZ has a dual index structure that is intended to help limit risk, according to the prospectus. Its equity portion tracks the volatility-weighted equity index, but its allocation to that index and to cash is determined by a second index, the CEMP International 500 Long/Cash Volatility Weighted Index.

Based on that benchmark, the fund allocates more of its assets under management to cash when there is a significant decline in the equity subindex from its all-time high; it can shift as much as 75 percent of its assets into cash depending on how long the decline lasts and how steep it is. In the case of a quick recovery, the fund will reinvest the assets in the equity index in one fell swoop, but should the decline continue over a sustained period of time, CIZ will reinvest in the equity market on a more gradual basis.

Compass EMP’s other funds include the following:

• Compass EMP U.S. Discovery 500 Enhanced Volatility Weighted (CSF), a small-cap ETF charging 0.58 percent
• Compass EMP U.S. 500 Enhanced Volatility Weighted (CFO), a large-cap ETF charging 0.68 percent
• Compass EMP U.S. 500 Volatility Weighted (CFA), a large-cap ETF charging 0.68 percent
• Compass EMP U.S. EQ Income 100 Enhanced Volatility Weighted (CDC), a large-cap ETF charging 0.68 percent

CIZ is the first international-focused ETF to be included in the fund family; it comes with an expense ratio of 0.78 percent.