Market Timing In An ETF Wrapper

August 20, 2015 What’s the biggest misconception people have about market timing?

McCarten: The idea of market timing in general is very polarizing. Historically, people felt it doesn't work. And I’d agree that for the last 30 years, it may have been irresponsible to market-time. But we feel that going forward to the next 30 years, it would be irresponsible not to try to market-time.

The time is right now. The data is available. The ability to analyze that data is here. We see numbers come out daily that are acted on by the markets. We know those numbers influence markets. We put together a model that represents that and captures a best-bet alpha. It can be done. Is there a time when it's more appropriate to time the market—a certain market environment, a certain market cycle?

McCarten: If you're looking at a systematic, disciplined approach, we don't really look at any one time as better than another. We research continuously. We're constantly updating our model. We're continually making changes. We look at variables that go into the model that academic papers have been published about. We have some proprietary variables we look at.

But again, those variables looked at, studied, researched, put in the model lead to an outcome. What comes out is what comes out. There is no passion, there is no emotion. Is it possible to make good market-timing calls on every asset class?

McCarten: We are only doing it in the U.S. equity space. To touch on your ETF—HTUS—should investors be concerned about capital gains payouts? Market timing here means we should expect to see a lot of internal portfolio turnover given the ETF is constantly adjusting between long, short and leveraged positions.

McCarten: The short answer is yes. Investors should be aware that this ETF is best-suited for a tax-deferred or tax-sheltered account. There will be capital gains. We do trade.

That said, we did look at this from the perspective of keeping capital gains as low as possible. First, by putting it in an ETF wrapper, the creation/redemption process allows us to somewhat offset some of those capital gains through the shares that are delivered through the process. But we have also put controls in place whereby we try to reduce the amount of trading while still keeping the best Sharpe ratio and return for the fund.

But yes, the investor should be aware that there would be capital gains on this because we trade throughout the year. What could go wrong with your model?

McCarten: The investor should do the research; understand the product and how it works; understand the tax consequences and how that plays into returns. The concern would be someone investing [in our model] without fully understanding that it's a long-term product that should be in a tax-deferred or tax-sheltered account.

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