Ben Fulton has brought many ETFs to market over the years, and he has been breaking new ground with his new firm Elkhorn Investments. Here he tells us how his latest launch, the Elkhorn Lunt Low Vol/High Beta Tactical ETF (LVHB) breaks the mold on traditional low-vol investing, and how being a new ETF issuer is a lot harder than it seems.
ETF.com: You helped bring to market one of the most popular low-vol funds, the PowerShares S&P 500 Low Volatility Portfolio (SPLV), while at PowerShares. Now you’ve launched LVHB under Elkhorn. How is LVHB an evolution or an innovation relative to SPLV?
Ben Fulton: It goes back to my view of low-vol and factors in general. The majority of factor ETFs aren’t really designed to be long-term buy-and-hold; they're access products. You're accessing a part of the market where you either feel it's undervalued, there's opportunity or better risk management.
Low vol is an interesting one, because most of the time, low-vol-type stocks provide a great way to get a respectable yield and better risk management and to remove a lot of downside draft. But there are times low-vol can become overpriced or out of favor.
We and our partner, Lunt Capital Management, believe in owning in the low-vol space. The idea was to own low vol two-thirds of the time, but a third of the time be in high beta, which is the flip side of low vol. There are times it's going to provide outperformance, or opportunities you can't find within low-vol names.
SPLV was never designed to be a stand-alone product; it was designed to be an add-on. If you already owned S&P 500 names, but were trying to tilt your portfolio to get more low-vol exposure, that's where you ended up—in SPLV. Today people are using it as a replacement product for S&P 500 funds. And I'm not sure if that’s right all the time.
We’re trying to create a product that harnesses the power of what’s in SPLV, but that has a relief valve to give you exposure to the counter-area of high-beta names. Investing in low vol or high beta no longer has to be a situation where you either own one or the other.
ETF.com: So LVHB is either in low-vol or in high-beta stocks at any given time?
Fulton: The majority of the time, it's in low vol. It's never a blend. It's either low vol or it's high beta. You could call this a low-vol rotation strategy.
ETF.com: What's the trigger for the switch? Is it valuations?
Fulton: It’s a proprietary methodology of Lunt's. It is a relative strength model. Essentially, they're looking at where the strength in the market is and where the leadership is. When you get to a point where low vol begins to become overextended, that's when you see the conversion. About a third of the time you actually want to be in high beta—it averages two to three changes per year, so it's very tactical.
ETF.com: If you cover both sides, is this a good replacement for the S&P 500?
Fulton: The group that brought in the initial seed—a large RIA out of Utah by the name of Soltis—used it to replace part of their traditional S&P 500 or large-cap U.S. exposure. That's the way they chose to use LVHB.
I think that's an artful approach, because you're looking at constant exposure to S&P 500 names, but you're picking what side of the coin of S&P 500 names you want to own at different times. It's not 50/50.