Today, Armor Indexes and Exchange Traded Concepts have rolled out a sector-focused ETF-of-ETFs. The Armor US Equity Index ETF (ARMR) was created with the idea of helping to improve performance by avoiding sectors that are likely to underperform and avoiding drawdowns.
ARMR comes with an expense ratio of 0.60% and lists on the NYSE Arca.
“One of the things that I’ve witnessed over the last 20 years is that a lot of decisions tend to get made at times that are either based on fear or greed. To me, that does not seem like a healthy way to approach asset management. One of the keys, I believe, to having success over the long term is to have a rules based or quantitative based structure around the decisions that you’re making,” said Armor Index founder Jim Colquitt.
“If you can reduce drawdowns through time and do so with a systematic approach, you’re likely to have better investment results over the long term,” he added.
The methodology of the underlying index relies on a metric known as the market performance indicator (MPI), which signals which sectors are likely to outperform while exhibiting the lowest downside risk. Those sectors are represented by sector ETFs that are equally weighted within the portfolio, the prospectus says.
“The idea here is that if we break it down into sectors as opposed to just getting exposure to the market as a whole, what we find is there are times when an individual sector may not be performing well but the overall market is. If we can eliminate exposure to that one sector—or two sectors or three sectors—then you can still have very solid returns by investing in the sectors that are doing well,” Colquitt noted.
The index is updated monthly and uses the Global Industry Classification Standard’s 11 sectors. When necessary, if the MPI says no sector is expected to perform well, the fund can shift into Treasury securities, according to the prospectus.
Colquitt said that the fund is currently using mostly Vanguard ETFs to get the required sector exposure due to their low costs and liquidity.
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