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Alpha Architect launched a new actively managed ETF that tactically allocates between asset classes based on indicators of relative sentiment between institutional and retail investors.
The Relative Sentiment Tactical Allocation ETF (MOOD US) was listed on NYSE Arca with an expenditure rate of 0.71%.
The fund uses low-cost, liquid ETFs offered by black rock Where Avant-garde to gain exposure to general market US equities, non-US developed equities, high quality bonds across multiple sectors and gold.
Alpha Architect first determines the ETF’s equity allocation based on the average of four relative sentiment indicators, each of which can range from 0% (extreme bearish) to 100% (extreme bullish).
The “position-based” relative sentiment indicator analyzes the relative holdings of institutional and retail investors in equities, long-term bonds and along the yield curve. Generally speaking, if institutional investors allocate more to equities than their historical average and retail investors allocate less to equities than their historical average, the indicator suggests a larger allocation to equities.
The “survey-based” relative sentiment indicator leverages machine learning capabilities to analyze the results of monthly surveys of institutional and retail investors regarding their outlook for economic health in the US, Europe, Japan and in Asia excluding Japan. Similar to the “Position-Based” indicator, this indicator uses the relative sentiment of these two groups of investors to suggest an allocation between US stocks and stocks listed in developed markets outside the US.
The Cross-Asset Relative Sentiment Indicator estimates the relative sentiment of equities indirectly via the relative sentiment of non-equity assets (such as certain bonds, currencies and commodities) that have historically been highly correlated to equities. For example, the bullish relative sentiment for natural gas has generally been bullish for equities.
The “Retail Macro” sentiment indicator measures the sentiment of retail investors on various commodities which are generally correlated to growth and inflation. When retail investors are very bullish on these commodities, it suggests that inflationary pressures are rising. If retail investors are very bearish on these commodities, this suggests that deflationary pressures are increasing. Stocks tended to do poorly on both counts. Therefore, if retail investor sentiment towards these commodities is neither too hot nor too cold, the indicator will suggest a larger allocation to equities.
Once Alpha Architect has determined the ETF’s equity allocation, it will allocate the rest of the fund’s portfolio to ETFs offering exposure to high-quality bonds and gold.
The ETF’s allocation to gold will generally equal the fund’s allocation to bonds, up to a maximum of 20%. The ETF will have greater exposure to gold if relative sentiment based on the position against the US dollar is bearish and real 10-year interest rates have fallen over the past few weeks.
The ETF will also allocate a maximum of 20% of its assets to gold if the fund’s equity allocation is less than 50%.
The bond side of the ETF, on the other hand, has a core allocation to ETFs providing global exposure to high-quality US dollar-denominated bonds. However, the ETF will also invest in ETFs offering exposure to US Treasury inflation-protected securities depending on the degree of macro sentiment towards commodities among retailers which, as described above, reflects pressures inflationary or deflationary.