Index methodology/strategy
Index universe:
(i) downside protection – making money in bear markets and
(ii) upside capture – capturing the majority of the upside of a bull market.
ASYMmetric Risk Management Technology
● Risk-On: Market prices are trending up and have low realized volatility
● Risk-Elevated: Market prices are trending down and have low realized volatility
● Risk-Off: Market prices are trending down and have high realized volatility
The principle of the ASYMmetric Risk Management Technology is to dynamically manage, as of each monthly Index rebalancing and reconstitution date, the Index’s net exposure to its market to:
● Capture the majority of the upside of the market in a bull market, by being net long;
● Protect capital by paring back net exposure during periods of heightened market uncertainty, by being market neutral; and
● Profit in bear markets, by being net short.
Original registration is here.
Updated registration is here.
Investment strategy visualized
Extract from Prospectus:
Principal Investment Strategies
The Fund employs a passive management or indexing investment approach designed to track the total return performance, before fees and expenses, of the Index. The Index is based on proprietary ASYMmetric Risk Management Technology developed and maintained by ASYMmetric Investment Solutions, LLC (the “Index Provider”), an affiliate of ASYMmetric ETFs, LLC, the Fund’s investment adviser (the “Adviser”).
The Index is a rules-based, quantitative long/short hedging strategy that seeks to provide protection against bear market losses and to capture the majority of bull market gains with respect to exposure to the 500 largest capitalized equity securities publicly traded in the United States, which is referred to as the Index’s “market.” The Index is powered by the Index Provider’s ASYMmetric Risk Management Technology, which dynamically manages the Index’s net exposure in three market risk environments:
| ● | Risk-On: Market prices are trending up and have low realized volatility, which is termed a “Risk-On” market environment; |
| ● | Risk-Elevated: Market prices are trending down and have low realized volatility, which is termed a “Risk-Elevated” market environment; and |
| ● | Risk-Off: Market prices are trending down and have high realized volatility, which is termed a “Risk-Off” market environment. |
The principle of the ASYMmetric Risk Management Technology is to dynamically manage, as of each monthly Index rebalancing and reconstitution date, the Index’s net exposure to its market to:
| ● | Capture the majority of the upside of the market in a bull market, by being net long; |
| ● | Protect capital by paring back net exposure during periods of heightened market uncertainty, by being market neutral; and |
| ● | Profit in bear markets, by being net short. |
The Index achieves its long exposure through investment in large cap equity securities that have the lowest volatility relative to the market. These securities are sorted according to industry sector and ranked from lowest to highest volatility within each sector. The lowest volatility securities from each sector are selected and then equal weighted within each sector. The sector weightings of the Index match the weights of the 11 General Industry Classification Standard (“GICS”) sectors of the SPDR S&P 500 ETF Trust (“SPY”). In order to effect its net short exposure to the market, the Index utilizes cash-settled short selling of the shares of SPY. Hypothetical proceeds from the Index’s short sales is maintained in cash or cash equivalents represented by U.S. Treasury bills or notes having less than three months to maturity or money market funds invested in such U.S. Treasuries. The Index’s net exposure to its market ranges between 100% long and -25% short where net exposure is the difference between the Index’s long equity positions (“Long Book”) and its short sales positions (“Short Book”).
Price Indicator Determination of Market Risk Environments. Market risk environments are quantitatively determined by the congruence of two proprietary price-based indicators that measure, monitor and quantify market risk. These indicators are called the “Inertia Indicator” and the “Panic Indicator.”
The Inertia Indicator is driven by the 200-business day moving average of the prices of the equity securities of the 500 largest capitalized companies traded in the U.S. The Inertia Indicator is designed to identify market price trends (up or down).
The Panic Indicator is driven by the Index Provider’s RealVol proprietary measure of the realized volatility of the Index’s market. RealVol measures the dispersion of prices of the 500 large cap securities comprising the Index’s market. RealVol is engineered to measure market risk (high or low) based on actual market price movements and not expected price movements.
The congruence of the output of the Inertia and Panic Indicators is used to classify monthly the Index’s market condition as either Risk-On, Risk-Elevated, or Risk-Off market environments, as outlined in the table below. The market is in a Risk-On environment when the market is technically trending up, above its 200-business day moving average, and volatility is low. The market is in a Risk-Elevated environment when the market is below its 200-business day moving average, but volatility has not spiked. The market is in a Risk-Off environment when the market is trending down, below its 200-business day moving average, and realized volatility has spiked.
| Market Risk Environment | ||
| Risk Environment Indicated | Inertia Indicator | Panic Indicator |
| Risk-On | Risk-On | Risk-On |
| Risk-Elevated | Risk-Off | Risk-On |
| Risk-Off | Risk-Off | Risk-Off |
Index Net Beta-Adjusted Exposure Determination. The market risk environment classification systematically determines the net exposure of the Index, as referenced in the table below. In the Risk-On environment, the net beta-adjusted exposure of the Index is 75%. In the Risk-Elevated environment, the net beta-adjusted exposure of the index is 0%. In the Risk-Off environment, the net beta-adjusted exposure of the Index is -25%.
| Index Net Exposure | |
| Risk Environment | Net Exposure |
| Risk-On | 75% |
| Risk-Elevated | 0% |
| Risk-Off | -25% |
Net exposure is determined utilizing a calculation of the “net beta-adjusted exposure” of the Index’s Long Book where the Long Book exposure is multiplied by a fraction that represents the volatility correlation or “beta” of the Long Book to the full Index market. Then the net exposure of the Index is subtracted from the net beta-adjusted Long Book exposure to establish the actual Short Book weight.
The following table presents an example of the calculation of the beta-adjusted exposures of the Index.
| Beta Adjusted Exposure - Example (Risk-On) | |||
Long Exposure | Long Book Portfolio Beta | Beta Adjusted Long Exposure | Beta Adjusted Short Exposure |
| 100% | 0.9 | 90% | 90% - 75% = 15% |
Weighting of Index Components. The Index is comprised of (1) a Long Book, (2) a Short Book, and (3) cash and cash equivalents. The Long Book is a proprietary rules-based low volatility version of the SPY. The Short Book is comprised of short sales of the shares of SPY. Cash and cash equivalents are held by the Index to represent the hypothetical proceeds from short selling of SPY. The weightings of these three components are formulaically determined based on the table below and are determined by the current market risk environment.
| Weighting of Index Components | |||
Risk Environment | Long Book Weight | Short Book Weight | Net Exposure |
| Risk-On | 100% | 0%-25% | 75% |
| Risk-Elevated | 35% | 0%-35% | 0% |
| Risk-Off | 20% | 0%-45% | -25% |
Index components of the Long Book are selected from the current portfolio constituents of SPY. SPY constituents are classified by GICS sectors and ranked according to volatility. The Long Book is sector neutral, meaning the weights of each sector in the Long Book match the sector weights of SPY. The weighting of the sector multiplied by the Index’s target of 50 Index components rounded to the nearest whole number equals the number of securities within each sector of the Long Book. Constituents with the lowest volatility are selected for each sector. The Long Book constituents are equal weighted within each sector. While the Long Book is initially targeted to have 50 component equity securities, rounding effects in the weighting process will cause the actual number of Index components to range from 48 to 52 component securities.
In tracking the Index, the Fund will generally hold its assets in Long Book securities, Short Book short sales positions and cash and cash equivalents with same weightings as they represent in the Index.
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