ETF Watch: New Type Of Product Proposed

A recent filing from Elkhorn outlines plans for the Amplify/ACEShares SB Global Tactical Index Trust. The product is essentially a unit investment trust (UIT) that will convert to an ETF once it hits a certain threshold for assets under management and reaches its one-year anniversary.

The “ACES” in ACEShares stands for “Amplify Convertible Equity Securities,” a structure whose development was spearheaded by Amplify’s Christian Magoon. According to the recently filed Form S-6, SEC approval of the structure is still pending. The current version of the filing notes that the UIT will convert to an ETF when it is one year old or when it crosses an as-yet-unspecified AUM amount. Barring a conversion, the UIT is scheduled to terminate at the 25-year mark.

The filing indicates that Elkhorn will serve as the UIT’s sponsor, while Amplify Investments will be the supervisor and evaluator of the UIT, and eventually the advisor of the ETF.

The concept is designed to make it easier for firms to incubate ETFs. UITs are considerably less costly to operate, meaning there would be less of an initial investment required of issuers and that seed money—something increasingly hard for issuers to raise for their products—would be less of a necessity. Further, firms would find it easier to allow their products to continue to trade with minimal assets, making it more likely they would be able to make it over that crucial three-year trading history threshold so many investors adhere to before investing in a new product.

A Complex Methodology

The product will track the Silver Birch Global Tactical Index, which includes two portfolios. Porfolio 1 is drawn from a selection pool that comprises the iShares Russell 2000 ETF (IWM), the SPDR Euro Stoxx 50 ETF (FEZ), the iShares 20+ Year Treasury Bond Fund (TLT), the iShares Russell 3000 ETF (IWV), the Powershares QQQ Trust (QQQ) and the SPDR Gold Shares (GLD). The methodology ranks the funds based on two- and four-month performance and three-month volatility, selecting the top two ETFs for the portfolio and equal-weighting them.

If either security chosen for Portfolio 1 falls below its six-month simple moving average as of the designated selection date, it will be replaced by a portfolio of three iShares Treasury bond ETFs representing long-, mid- and short-term maturity ranges.

Portfolio 2 incudes one security selected from a group that includes the iShares TIPS Bond ETF (TIP), the iShares MSCI Emerging Markets ETF (EEM), the iShares MSCI EAFE ETF (EFA), the iShares Cohen & Steers REIT (ICF), the iShares S&P 500 Value ETF (IVE), the iShares S&P 500 Growth ETF (IVW) and the Powershares DB Commodity ETF (DBC). The methodology ranks the members of the selection pool based on two-month performance, 20-day performance and three-month volatility, then selects the top-ranked fund.

If the chosen security for Portfolio 2 falls below its three-month simple moving average as of the designated selection date, it will be replaced by a portfolio of three iShares Treasury bond ETFs representing long-, mid- and short-term maturity ranges.

Portfolio 1 receives a 60% weighting, versus a 40% weighting for Portfolio 2. Rebalancing occurs on a quarterly basis.

No listing exchange, expenses or ticker symbol were included in the filing.

Contact Heather Bell at [email protected].