VanEck has debuted a dynamic long/short ETF strategy that allows long-term investors to capitalize on growth in the equity market and also hedge against periods of large drawdowns.
On Thursday, VanEck launched the VanEck Vectors NDR CMG Long/Flat Allocation ETF (NYSEArca: LFEQ). LFEQ comes with a 0.59% expense ratio.
“Many investors make an allocation to U.S. equity for the long-term growth potential, but most may not realize that since 1928 the S&P 500 has spent 70% of the time either in a bear market or recovering from one. That’s not a lot of time spent growing new wealth,” Ed Lopez, Head of ETF Product Management at VanEck, said in a note. “Your experience really depends on where in the market cycle you start investing. LFEQ provides investors with an ETF solution that offers a systematic approach that seeks to preserve capital by increasing cash when market health is weak, and participate in uptrends with a full allocation to equity.”
LFEQ tries to reflect the performance of the Ned Davis Research CMG US Large Cap Long/Flat Index, which follows trade signals that dictates the portfolio’s equity allocation ranging from 100% fully invested or “long” S&P 500 exposure to 100% in cash or “flat” Solactive 13-week U.S. T-Bills, according to a prospectus sheet.
“When markets are trending down, the Index responds to signals to raise cash, helping to manage risk and seeking to avoid potentially significant losses that require larger gains to break even,” according to VanEck.
The index’s model follows a two-phase process. The first phase measures trend following and mean reversion within the S&P 500 industry groupings to determine a bullish or bearish market environment. Additionally, the model applies a risk filter process to ensure that all of the price-based industry level indicators are effective over time.
The second phase utilizes the scores taken from the first phase to produce the equity allocations of the index. When the index is not completely long or flat, either 80% or 40% of the portfolio will be allocated to the S&P 500, with the remainder allocated to the Solactive 13-week U.S. T-bill Index.
The ETF’s indexing methodology “avoids market directions that can affect an investors’ longer term goals,” Lopez told ETF Trends in a call.
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