A Sector Rotation ETF From State Street In The Cards?

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Includes: DWTR, HUSE, SCTO, SHY
by: Zacks Funds

State Street Global Advisors seems to be trying its hands at offbeat concepts. The sought-after issuer, hugely famous for its large-cap Select Sector SPDR ETFs, recently filed for SPDR SSGA U.S. Sector Rotation ETF. Below we detail the proposed fund.

Proposed Fund in Focus

As per the SEC filing, the fund looks to offer capital appreciation. The fund adopts a fund-of-funds approach. The issuer uses a sector-allocation strategy and assigns the portfolio's assets to any combination of the Select Sector SPDR ETFs.

The portfolio's share among equity sectors will be according to the issuer's evaluation of the expected returns and risks of each equity sector. Also, the allocation will follow what the issuer deems the best-possible combination.

The allotment to each sector will modify as the issuer's perception toward each sector change. Notably, the basket will be large-cap in nature. As per the prospectus, the portfolio will normally see a monthly rebalancing; but the rebalancing could happen more frequently subject to market conditions. The expense ratio and ticker code of the fund are yet to be declared.

How Does it Fit in a Portfolio?

The fund could prove to be a great option for investors seeking to ride the high potential sectors of the U.S. economy. Since the fund will deploy both a quantitative and a qualitative approach and will undergo rapid rebalancing, its chances of capital gains are higher (read: Defensive Stocks & ETFs for Portfolio Protection).

ETF Competition

The road ahead is almost clear for the proposed fund, if it gets approval. The Global X JPMorgan U.S. Sector Rotator Index ETF (NYSEARCA:SCTO) may give the proposed fund a run for its money as both share the same investment objective. However, a subtle difference still lies between them. SCTO charges a management fee of 69 bps a year.

As understood from the State Street prospectus:

The investment universe of the Underlying ETFs comprised companies in the consumer discretionary, consumer staples, energy, financial, health care, industrials, materials, technology and utilities sectors, although this may change from time to time.

This means that as of now, the proposed fund does not have any fixed-income exposure. On the other hand, SCTO invests 6.20% of its assets in the iShares 1-3 Year Treasury Bond ETF (NYSEARCA:SHY) (read: Weekly ETF Asset Round-Up: Equity Tops, Bonds Lag).

Investors should note that there is another sector rotation ETF, namely the PowerShares DWA Tactical Sector Rotation Portfolio (NYSEARCA:DWTR), which has amassed $97.6 million since its inception in October 2015. DWTR looks to offer exposure in sectors with the strongest relative strength in the U.S. through the universe of nine PowerShares DWA sector Momentum ETFs.

However, investors should note that the U.S. sector rotation funds do not have a winning record. SCTO has managed to garner just $14.9 million in assets since it debuted in October 2014. Among others, Sector Rotation ETF (NYSE:XRO) was shut down in the absence of adequate assets. The Huntington U.S. Equity Rotation Strategy ETF (NYSEARCA:HUSE) is yet another actively managed ETF which invests in companies that are organized in the U.S. and included in the S&P Composite 1500 in normal circumstances. The ETF can be heavy and low on certain sectors and segments of the S&P Composite 1500, based on what the managers think "have the greatest or least potential for capital appreciation given the current market environment." The fund has a net expense ratio of 0.95% and has amassed about $4.6 million in assets so far. Thus, the success of the proposed product is questionable given the past record of similar-themed products. But with some luck and precision in portfolio modeling, it may see great times ahead.

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