Aptus Capital launched its second ETF, a strategy that hones in on attractively priced companies with a quality twist and hedges against significant equity market downturns when the market is seen as overvalued.
On Tuesday, Aptus Capital rolled out the Aptus Fortified Value ETF (BATS: FTVA), which has a 0.79% expense ratio.
The Aptus Fortified Value ETF tries to reflect the necromancer of the Aptus Fortified Value Index, a rules-based, equal-weighted index that provides exposure to 50 of the most undervalued U.S. stocks and hedges against potential downturns if the markets are seen as overvalued.
The index is usually composed of 50 common stocks and real estate investment trusts, but if the U.S. equity market is seen as overvalued, a so-called tail hedge of long put options is executed. When the tail hedge is not in effect, the index is 100% long equities. If the tail hedge is implemented, the index is composed of 99.5% of equity component and a 0.5% tail hedge, according to a prospectus sheet.
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The hedge acts like a long put on a broad U.S. market ETF equal to 0.5% of the index’s total weight. A long put is an options strategy where a put option is purchased as a speculative play on a downturn in the price of the underlying equity or index, which is typically used to hedge a long stock position.
The equity component is screened on fundamental measures, including ree cash flow relative to its size, return on capital employed (a measure of profitability relative to a company’s capital), and change in price-
to-earnings ratios over the past five years.
The tail hedge calculates the U.S. equity market’s “Q Ratio”, a measure of the total market capitalization of the U.S. equity market divided by the net worth of U.S. companies. When the Q Ratio is above the median based on its history, the tail hedge is implemented on the next business day or the last business day of the month where it remains in place for the next full month.
For more information on new fund products, visit our new ETFs category.