The evolution of the ETF industry has spawned more than a handful of instruments allowing investors of all walks unprecedented access to virtually every corner of the global market. The wave of innovation continues to bring forth an ever-expanding lineup of tools, serving everyone from portfolio managers to active traders and in between. Active management has grown in popularity as the cost-efficient nature of the ETF wrapper has allowed investors to tap into traditionally complex and costly strategies.
The ETP universe has seen a growing number of quantitative based, hedge fund-like products launch, allowing for even further reach into the world of more sophisticated strategies for mainstream investors. Luckily, the roster of “passive” ETPs has also evolved to offer access to strategies which rival some of the actively-managed ETFs.
Below we highlight a number of instruments which serve to offer a degree of active management, but fall under the umbrella of “passive” ETPs. The products highlighted below seek to offer exposure to trend-following strategies so to speak; as such, they may appeal to investors who are looking for an easy, “hands off” way to tap into a given asset class and retain the flexibility to shift exposure to the sidelines in case market conditions become unfavorable.
RBS Securities is the issuer behind a diverse lineup of trend-following ETNs, each one offering rules-based exposure to a popular asset class. The “Trendpilot” strategy is fairly straightforward; the underlying indexes shift allocations between cash and the relevant exposure based on the performance of the specified benchmark relative to a historical moving average. When the underlying index is at or above its 200-day simple moving average for five consecutive trading sessions, the given ETN will be long the underlying index. On the flip side, if the same indexes closes below its 200-day SMA for five consecutive sessions, exposure will be shifted to 3-month U.S. Treasury bills. In simpler terms, these ETNs will automatically move to the sidelines and limit losses when a downtrend appears to be developing in the given index:
- China Trendpilot ETN (TCHI): This ETN offers dynamic exposure to the BNY Mellon China Select ADR Total Return Index. TCHI is the most popular and cheapest offering from this pack, charging 0.50% in annual expense fees; all of the other ETNs listed below charge 1.0% in annual fees.
- US Large Cap Trendpilot ETN (TRND): This ETN offers dynamic exposure to the S&P 500 Total Return Index.
- US Mid Cap Trendpilot ETN (TRNM): This ETN offers dynamic exposure to the S&P 500 Midcap Total Return Index.
- Gold Trendpilot ETN (TBAR): This ETN offers dynamic exposure to the price of gold bullion.
- NASDAQ-100 Trendpilot ETN (TNDQ): This ETN offers dynamic exposure to the NASDAQ-100 Total Return Index.
- Oil Trendpilot ETN (TWTI): This ETN offers dynamic exposure exposure to the RBS 12-Month Oil Total Return Index. TWTI separates itself from the pack by charging a fairly steep 1.10% expense fee.
Investors should note the inherent credit risk of the issuing institution that is associated with the ETN product structure.
Volatility Response ETFs
Direxion offers three unique ETFs that shift exposure automatically between the given stock index and U.S. Treasury bills similar to the Trendpilot ETNs; the twist however is that these funds make allocation decisions based on historical volatility levels rather than moving averages. Based on the volatility of the underlying index, the allocation of each of these Direxion ETFs will shift. At the “target volatility” level, the given ETF will be invested 100% long in the equity benchmark; it should be noted that these ETFs may utilize leverage, seeing as how the stock component can oscillate from 28% to 150%. Another difference compared to the TrendPilot products: these ETFs are not “all or nothing” and can vary the amount of equity exposure across a relatively wide range.
These ETFs may appeal to buy-and-hold investors since periods of above-average market volatility tend to coincide with big swings and potentially adverse losses; while periods of below average volatility may offer a greater likelihood of favorable returns in the underlying index:
- S&P 500 RC Volatility Response Shares (VSPY): This ETF offers dynamic exposure to the S&P 500 Index based on observable volatility conditions.
- S&P 1500 RC Volatility Response Shares (VSPR): This ETF offers dynamic exposure to the S&P 1500 Index; similar to VSPY and VLAT, this ETF also charges o.45% in annual expense fees.
- S&P Latin America 40 RC Volatility Response Shares (VLAT): This ETF offers dynamic exposure to the S&P Latin America 40 Index.
These ETFs take the guesswork out of knowing when to be long and when to scale back your exposure based on historical volatility readings for each of the underlying indexes. Furthermore, these ETFs can make adjustments as frequently as the methodology requires, even on a daily basis, allowing for great flexibility when it comes time to respond to quickly changing market conditions.
Barclays ENT+ S&P VEQTOR ETN (VQT)
This ETN makes allocation decision based on historical volatility levels, similar to the Direxion’s Volatility Response products. VQT however separates itself from the rest of the products highlighted here thanks to its underlying portfolio; this ETN offers broad equity market exposure with an implied volatility hedge by dynamically allocation its investments across three components, including equity, volatility, and cash.
The equity and volatility components are represented by S&P 500 Index and S&P 500 Index VIX Short-Term futures respectively. By including a volatility component, this ETN has the potential to deliver positive returns even when equity markets are plagued with turbulence. VQT charges 0.95% in expense fees and bears credit risk given the nature of its product structure.
Disclosure: No positions at time of writing.
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