Liquid Alts ETF Takes Cues From Lumber, Gold

November 18, 2020

Toroso Investments' Tidal ETF Services has launched an actively managed fund designed to provide systematic risk management. The ATAC US Rotation ETF (RORO) switches between U.S. equities and Treasury securities based on differences in the price performance of gold and lumber, according to the prospectus.

RORO comes with an expense ratio of 1.13% and lists on the NYSE Arca.

Although the fund is actively managed, it takes its cues from the ATAC Risk-On/Risk-Off Index, which tracks the performance of gold relative to lumber and produces a weekly signal. When the lumber outperforms gold, the fund switches to a “risk on” approach, and takes on 130% exposure to U.S. securities via ETFs, which can include leveraged funds. But when gold outperforms, the fund switches to 100% exposure to ETFs tracking long-duration U.S. Treasuries, the fund document says.

The index allocates primarily among cash and three iShares ETFs: the iShares Russell 2000 ETF (IWM), the iShares Russell 1000 Growth ETF (IWF) and the iShares 20+ Year Treasury Bond ETF (TLT). However, as an actively managed fund, RORO does not necessarily hold the ETF positions that make up the index.

The Background

Michael Gayed, a portfolio manager at Toroso Asset Management and the author of award-winning papers on the ATAC methodology, has been running a similar mutual fund since 2012 that relies on different signals than RORO. He says the principle underlying RORO is that you may not know the mile marker at which your car will crash, but you know the conditions that favor an accident.

“In the context of markets, there are leading indicators that help identify those conditions around the likelihood of higher volatility,” he said.

“Historically, when lumber is outperforming gold, up more or down less, typically you tend to see lower stock market volatility afterwards,” Gayed said. Because of its ties to housing and by extension consumer wealth, it’s an early sign of reflation that benefits small caps and growth stocks, Gayed notes, pointing out that gold ties into volatility, rising when volatility is expected to increase.

“It’s a very binary [approach]: Either all-in aggressive risk-on equities or all-in aggressive risk-off Treasuries using two seemingly unrelated commodities that unequivocally have predictive power, at least historically,” he added.

“Most alpha doesn’t come from being up more. Most alpha comes from down capture. But because periods of down capture are relatively few and far between, it means the bulk of the alpha will typically come from risk off,” Gayed said, noting that risk-off conditions are fairly infrequent and that the bulk of the strategy’s outperformance comes from getting the Treasury trade right.

Gayed says he thinks the fund is more of a satellite allocation of 5-10% than a core holding. With diversification hard to get from a traditional 60/40 portfolio allocation due to low yields in the fixed income space, he says that investors are better off seeking diversification through strategies rather than asset classes and that is where RORO can be a solution.

Contact Heather Bell at [email protected]

 

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