ETF Watch: Newcomer Debuts 2 Funds

FormulaFolio Investments, a private money manager, is breaking into the ETF industry with the launch of two actively managed funds-of-funds with very different objectives. The FormulaFolios Hedged Growth ETF (FFHG) and the FormulaFolios Income ETF (FFTI) will both invest primarily in other ETFs.

FFHG comes with an expense ratio of 1.15%, while FFTI charges 1.00%. Both funds are listed on the Bats exchange, which is owned by ETF.com’s parent company, CBOE.

Growth-focused FFHG’s portfolio invests 50% each into two different proprietary investment models, according to the prospectus. The first uses momentum indicators to invest in leveraged ETFs when market conditions are favorable, and switches to U.S. Treasuries and inverse ETFs when those same indicators suggest market conditions are unfavorable. The prospectus notes that the fund will invest no more than 15% of its assets in inverse and leveraged ETFs.

Two Equal-Weight Approaches

The second model comprises two equally weighted strategies. One toggles between a diversified portfolio of U.S. equity ETFs when trends suggest the market is doing well and U.S. Treasuries when trends suggest the market is faltering. The second strategy relies on the same trend indicators, but selects one sector of the S&P 500 to invest in based on momentum and low volatility when equities are favored. When equities are not favored, it invests in Treasuries and inverse ETFs.

FFTI, on the other hand, targets income and invests in ETFs that target foreign and domestic fixed-income securities. It uses a model to rank five fixed-income classes based on yield spread and price momentum, selecting the top three classes to include in the portfolio. However, asset classes are automatically excluded if they do not have positive momentum. The chosen asset classes are represented in FFTI’s portfolio by ETFs selected for their low costs, low tracking error and high volume, the prospectus says.

The portfolio is re-evaluated on a monthly basis. High-yield U.S. debt and Treasuries are each limited to a weighting of 56.67% in the portfolio, while the U.S. aggregate bond space, U.S. investment-grade debt and international government bonds are each limited to 21.67% weightings. The prospectus notes that if more than two of the asset classes do not have positive price momentum, the fund will give more weight to short-term U.S. Treasurys.

Contact Heather Bell at [email protected].