There was a time not too long ago when investors couldn't run an ETF selector screen without being inundated with "smart beta," or factor funds.
Those days are mostly gone and, lately, we have all been trying to sort our way through so-called environmentally friendly ESG products, although that trend is in the process of being, let's say, moderated. Another product that has done relatively well in gathering assets has been the risk-on/risk-off approach, usually through observation of a 200-day moving average or other longer-term metric. ETF issuer Adaptiv ETFs has recently launched a new ETF through white-label issuer Exchange Traded Concepts that look to employ both a risk-on/risk-off and a factor-based approach to setting both the asset mix and security selection for the portfolio.
ADPV
The Adaptiv Select ETF (ADPV) is an actively managed U.S. Equity long-only exchange-traded fund that was launched Nov. 4 with a 100-basis point expense ratio. Interestingly, this fund launched with 10,001 shares at a $25 Net Asset Value (NAV), meaning it came to market with only $250,000 in seed capital, but in the past few days has seen an additional $1.5 million come in, so I'll be keeping an eye on the asset growth of this fund for a little bit. The fund seems to take a purely quantitative approach to both the risk-on/off decision and, assuming risk is on which 25 names are held in the portfolio.
Risk-On/Risk-Off Switch
In reviewing the prospectus, the fund uses what I'll call a modified "golden cross"/"death cross" indicator to signal fund positioning. A traditional "golden cross"/"death cross" pattern is established based on the relationship between the 50-day and 200-day moving average of whatever index or stock you're tracking. If the 50-day moving average crosses higher than the 200-day moving average it's called a "golden cross" and if it crosses going lower it is referred to as a "death cross." This fund observes the relationship between the 5-day and 200-day moving averages, which it describes as "the 500 largest exchange-traded securities in the United States." It's not clear if this list includes ETFs but if so, would count 68 funds in the top 500 by my calculations as of Thursday. This would, of course, include some broad market measures like the S&P fund (SPY) , iShares Core S&P 500 ETF (IVV) , Vanguard Total Stock Market Index Fund ETF (VTI) , the Invesco fund (QQQ) , and Russell 2000 (IWM) to name a few.
This metric is observed "on the last trading day of every week" and the portfolio is adjusted accordingly. If the signal indicates risk is off, then the portfolio is set to holding short-term U.S. Treasuries and if risk is on, the portfolio is set to the top 25 names that fall out of the metrics I'll take about next.
Factors
Holdings for the risk-on portfolio are selected by measuring and scoring equities by two momentum factors and are equally weighted. The first is described as "a measure of the rate of change of a security's price over a specified period of time" but doesn't go as far as to define the lookback period. The second is referred to as the "average true range" and is described as "a measure of the rate of volatility in a security's share price over a specified period of time" which again, is not disclosed.
The prospectus outlines a buffer rule wherein names that make the top 25 in one period but rank lower in a subsequent period will remain in the portfolio unless they fall in rank below "a threshold ranking specified by the model."
Wrap it Up
I'm always happy to see new entrants to the ETF marketplace as well as innovative products. While I can appreciate that Adaptiv is providing investors with a lot more than basic broad market exposure, I'm not convinced, yet anyway, that what are providing merits a 100-basis point expense ratio. Aside from an expensive price tag, I am enthusiastic about what seems to be a disciplined quantitative approach to both asset allocation and security.
