iFunds: Our 3 Most Interesting ETF Plays

Not all investors might be comfortable going short or inverse when it comes to exchange traded funds (ETFs), but Stacey Ash, investment manager and head of sales at Coventry-based asset manager iFunds, insists that sometimes that strategy is the best way to lower volatility.

iFunds manages four £55 million portfolios of ETFs, using short-term volatility to determine asset allocation and level of risk. The algorithmic model latches onto trends in the market place – typically those that have lasted six months of longer – and follows them to allocate assets. iFunds analyses a universe of 35 indices and picks the most liquid ETF tracking a given index for the portfolios.

Ash explained that most trends in the market place are negative at the moment, as investors are taking “chips off the table”, leaving only three positive (short) trends – short commodities, short UK gilts and short FTSE 100 (see below).

“These are our favourite trends as they highlight the benefits of a momentum approach,” he said. “The strength of the negative instruments in gilts, commodities and the FTSE 100 is such that it benefits us to be invested. Who knows where the future will go.”

Ash said that roughly a third of the investments iFunds make turn out to be wrong choices, as the trend picked up by the algorithm ends soon after investing, but that the model picks more right decisions than wrong ones to make overall positive returns.

Ash added that traditional risk profiling tools used by advisers don’t take into account the changing nature of asset classes – say, when corporate bonds acted like equities in 2008 – and recommend an output of certain asset classes e.g. 20 percent equities for a low-risk investor.

1) db X-trackers FTSE 100 Short Daily UCITS ETF (XUKS)

This fund launched in 2008 and has grown to £24 million under management. It charges 0.50 percent per year in fees and has returned over 3 percent over the last three months.

The only three positive long-only trends Ash identifies at the moment is the FTSE small cap, FTSE mid cap and European equities.

“Clearly, if only those indices are in positive trend, everything else people have taken a negative viewpoint on, including gilts, and commodities,” he said.

2) db x-trackers II UK Gilts Short Daily UCITS ETF (XUGS)

This £10 million swap-backed fund was also brought to market in 2008. It charges 0.25 percent per year and aims to produce the inverse returns of UK gilts. It has returned almost 1 percent year to date.

“Although gilts are going down, they’re clearly doing it with lower volatility than other asset classes,” said Ash.

3) ETF Securities Daily Short All Commodities UCITS ETC (SALL)

This fund tracks 22 commodities and charges 0.98 percent per year. It was also launched in 2008 and now has £2 million under management. The fund has over 30 percent in energy, 29 percent in agriculture, and around 30 percent in precious and industrial metals. The top holding is gold at 12.1 percent of the fund. As for performance, it is up 12.7 percent year to date.

Ash has only just bought the fund – as of 5 August – because his firm’s algorithm only latches onto trends after six months.