Newcomer Debuts Reversal Strategy ETF

Today a newcomer to the ETF industry launched the first ETF to implement a short-term reversal investment strategy. The Vesper U.S. Large Cap Short-Term Reversal Strategy ETF (UTRN) tracks an index that is reconstituted weekly and includes 25 equally weighted securities selected from the components of the S&P 500 Index.

UTRN comes with an expense ratio of 0.75% and lists on the NYSE Arca.

“Everyone who’s ever put a dime into the stock market is familiar with [the phenomenon where] on a daily basis, information hits the markets and investors overreact,” said Vesper Co-founder and President John Thompson. “A lot of cases, once the story is vetted and the smoke clears, the better-run companies and the more fundamentally sound companies rebound.”

Methodology

The index methodology applies an algorithm based on a metric called Chow’s ratio. The short-term reversal effect that the index seeks to capture occurs when a poorly performing stock has a turnaround and outperforms peers after lagging them previously. Chow’s ratio relies on short-term pricing and volatility data to target stocks that have experienced one-week declines and assesses their likelihood of experiencing a reversal based on their fundamental soundness.

The metric UTRN is based on was developed by Dr. Victor Chow, a professor of finance at West Virginia University. The fund’s methodology applies the metric on a weekly basis to select 25 new components. According to Vesper’s Thompson, the fund experiences high turnover each week, turning over roughly 80% of its portfolio.

That turnover is why the strategy has not been available to retail investors, and has mainly been the domain of hedge funds, which can get institutional trading prices. However, the high liquidity of the components as well as the ETF wrapper mean the strategy is feasible for ordinary investors to access, Thompson says.

Describing UTRN as a short-term contrarian play, Thompson notes that the fund has “its own unique return stream.” He recalls that one of the advisors he discussed UTRN’s approach with termed it a “next-generation low-volatility strategy.”

Contact Heather Bell at [email protected]