ETF Name: Global X Adaptive U.S. Risk Management ETF
Ticker: ONOF
Expense Ratio: 0.39%
Filed: October 21, 2020
Effective date: January 4, 2021 (Monday)
Index/investment strategy: Adaptive U.S. Risk Management Index developed by Carroll Financial and calculated by Solactive
Adviser: Global X Management Company LLC
Summary
ETF invests in 500 large cap equities (probably the same as the S&P500 but not explicitly stated to avoid trademark issues) or in US 1-3 Treasuries. Four signals will determine whether the ETF invests in equities or Treasuries.
Objective of this strategy is to have exposure to the performance of a broad basket of US equities while partially shielding performance from downturns, based on popular trend-based metrics.
Product Analysis
- Investment Merit
- This strategy takes four difference trend indicators for a rules-based investment strategy. Why not?
- Commerciability
- Easy to explain to investors so may be popular with investment advisors who want to show their US clients that they're not just investing in the S&P 500.
- Sale has to be done in the first sentences of the pitch otherwise the investor will be overwhelmed.
- Feasibility
- Operationally straightforward as it's replicating an index of US large-cap securities. However, the 100% turnover swing from all equities to US Treasuries and vice-versa in three days may incur substantial operating costs. The four signals should make these moves infrequent, but the lag will also dampen the full effect of the up and downsides.
Investment Process
Mitigate downside volatility of US equity position by investing in constituents of a US index of 500 securities or in US Treasuries with 1-3 years to maturity depending on four signals.
- SMA (200-day simple moving average)
- MACD (moving average convergence divergence)
- Drawdown Percentage (drop from recent peak price of the US equity position)
- VIX (Cboe Volatility Index)
- If ETF in equity position, requires three signals to change to US Treasuries
- If ETF in US Treasuries, requires only two signals.
Three trading days to move positions.
Further information:
Index (Solactive) methodology here.
Index developer Carroll Financial, a financial advisory firm.
Triggers rules in prospectus here. Extract below:
◦SMA Signal:
▪Market Exit Vote: If the prior day Z-Score of the percent difference between the U.S. Equity Position closing price and the 200-day SMA of the U.S. Equity Position is below -0.50, the signal indicates to exit the U.S. Equity Position and enter the U.S. Treasury Position.
▪Market Entry Vote: If the prior day Z-Score of the percent difference between the U.S. Equity Position closing price and the 200-day SMA of the U.S. Equity Position is below -4.00, the signal indicates to exit the U.S. Treasury Position and enter the U.S. Equity Position.
◦MACD Signal:
▪Market Exit Vote: If the prior day Z-Score of the MACD is below -0.25, the signal indicates to exit the U.S. Equity Position and enter the U.S. Treasury Position.
▪Market Entry Vote: If the prior day Z-Score of the MACD is above 4.00, the signal indicates to exit the U.S. Treasury Position and enter the U.S. Equity Position.
◦Drawdown Percentage Signal:
▪Market Exit Vote: If the prior day Drawdown Percentage Z-Score is below 0.50, the signal indicates to exit the U.S. Equity Position and enter the U.S. Treasury Position.
▪Market Entry Vote: If the prior day Drawdown Percentage Z-Score is below -2.00, the signal indicates to exit the U.S. Treasury Position and enter the U.S. Equity Position.
◦VIX Signal:
▪Market Exit Vote: If the Z-Score of the level of the VIX is 1.25, the signal votes to exit the U.S. Equity Position and enter the U.S. Treasury Position.
▪Market Entry Vote: If the Z-Score of the level of the VIX is above 5.5, the signal indicates to exit the U.S. Treasury Position and enter the U.S. Equity Position.
Portfolio Managers:
John Belanger, CFA; Nam To, CFA; Wayne Xie; Kimberly Chan; and Vanessa Yang
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