Traders may trade on technical factors over the course of shifting market conditions, but Alpha Architect has come out with a smart beta exchange traded fund strategy with a built-in trend following component that helps weather a storm and still capture any potential upside.
On Wednesday, Alpha Architect rolled out the Alpha Architect Value Momentum Trend ETF (BATS: VMOT). VMOT has a 0.79% total expense ratio.
The Value Momentum Trend ETF tries to reflect the performance of the Alpha Architect Value momentum Trend Index, which utilizes a proprietary methodology developed by Empirical Finance, d/b/a Alpha Architect to select component holdings. The fund is also a fund-of-funds, so it primarily holds assets in shares of other ETFs.
VMOT will be primarily composed of the other Alpha Architect ETFs, including the ValueShares U.S. Quantitative Value ETF (BATS: QVAL), ValueShares International Quantitative Value ETF (BATS: IVAL), MomentumShares U.S. Quantitative Momentum ETF (BATS: QMOM) and MomentumShares International Quantitative Momentum ETF (BATS: IMOM).
A “momentum” investment style emphasizes investing in securities that have had better recent total return performance compared to other securities, whereas a “value” investment style emphasizes investing in securities that based on quantitative analysis are considered undervalue compared to other securities.
“The Index is developed based primarily on a risk-parity approach, which focuses on an allocation of risk rather than an allocation of capital,” according to the prospectus. “The Fund uses risk parity to seek to construct a portfolio with less volatility and risk. As of March 1, 2017, the Index was weighted as follows: 22.27% in the ValueShares U.S. Quantitative Value ETF; 25.33% in the ValueShares International Quantitative Value ETF; 24.79% in the MomentumShares U.S. Quantitative Momentum ETF; 27.61% MomentumShares International Quantitative Momentum ETF; and 0% in cash and cash equivalents.”
In downtrending markets, the underlying index may hedge up to 100% of the value of its long portfolio by shorting a representative broad based U.S. securities index ETF when either one or both conditions are met: First, the U.S. equity markets’ total return over a rolling twelve calendar month period is less than or equal to U.S. Treasury bill returns over the same period. Second, the U.S. equity markets’ twelve month moving average exceeds current price.
There is a 50% weight to each rule. If both are triggered, the index’s U.S. equity portfolio will be fully hedged. If one rule is triggered the index’s U.S. equity portfolio will be 50% hedged. Otherwise, the index’s U.S. equity portfolio will have no hedge.
The same hedging methodology is applied with its international portfolio.
For more information on new fund products, visit our new ETFs category.