Today a new issuer has rolled out an ETF offering a unique take on high-beta strategies. The Salt truBeta High Exposure ETF (SLT) tracks a high-beta index that incorporates intraday data and can serve as an alternative to currently available leveraged strategies.
The fund comes with an expense ratio of 0.50% and lists on Cboe Global Markets’ Cboe BZX exchange. Cboe is the parent company of ETF.com.
The fund’s underlying index takes the 1,000 largest U.S.-listed stocks and REITs, and selects the 500 most liquid securities. From there, the index relies on a proprietary algorithm that uses projected beta to calculate the truBeta forecast for each of the companies remaining in the universe. Those with low correlations to the broader market are removed from consideration, according to the prospectus.
“It’s an index of the 100 stocks with the highest sensitivity to market movements or beta,” said Salt Financial’s founder and Chief Investment Officer Tony Barchetto. He notes that the firm’s proprietary truBeta forecast is calculated in a very different way from typical indexes, and that it relies on recent intraday data as well as longer-term data in its model, making for what the firm believes is a more accurate forecast of market sensitivity. Typically, beta calculations are much more focused on backward-looking data.
“We’re able to build a high-beta index that mimics the benefits of leverage without using derivatives, without using borrowing, without some of those daily reset issues that the leveraged products have,” he added.
The truBeta forecast incorporates machine learning into its model, meaning it can use prior results to fine-tune the model with the intention of improving its accuracy. The model uses a wide range of historical risk and returns data, and compares it to the broad market as represented by the SPDR S&P 500 ETF Trust (SPY). The methodology selects the 100 companies with the highest truBeta rankings and includes them in the resulting equal-weighted index, the fund documentation notes.
The prospectus warns that the underlying index has significant exposure to the energy, financial and technology sectors. However, to ensure no sector fully dominates, the index limits each sector to 30 stocks or fewer.
“We needed this to be a portfolio construction tool that gave investors magnified exposure to the overall market,” said Alfred Eskandar, the firm’s president, co-founder and chief operating officer.
The index is rebalanced quarterly. The prospectus indicates that, as of mid-March, the index had a beta of 1.27 relative to a beta of 1.00 for SPY.
Salt Financial indicates the fund can be used as a replacement for leveraged products, and unlike such investments, which require constant investor vigilance and should only be used short term, SLT can be used as a longer-term solution.
“It’s really the only alternative for an investor looking to increase exposure to the market and doesn’t want to play around with futures or options, because they’re too complicated,” Barchetto said, pointing out that dealing with margin is also a problem for many investors.
Eskandar notes that leveraged ETFs are great for investment horizons of up to a few days.
“However, outside of day traders and perhaps some professional hedge funds, the average investor has a much longer time horizon, and they tend to express their investment views not so much in hours or days but perhaps quarters or even years,” he said, adding that no good advisor would tell a client to borrow on margin.
According to Barchetto, his firm adopted the Salt name with the idea that its strategies would provide “seasoning” to a portfolio rather than making up the bulk of its investments. The truBeta strategy is expected to be the cornerstone for the firm’s future products, including sector funds.
Barchetto also notes the timing of the launch seems to be right. The return of volatility seriously dented the performance of many leveraged ETFs, while rising interest rates have increased the cost of borrowing on margin. Investors looking for alternatives to getting leveraged exposure could be drawn to SLT as a result.
Contact Heather Bell at [email protected]