Index provider Armor Indexes has teamed up with white-label platform Exchange Traded Concepts to launch a US sector rotation ETF that aims to limit downside risk.

Armor Indexes specializes in providing indices that are designed to protect investors against downside risk.

The Armor US Equity Index ETF (ARMR US) has listed on NYSE Arca and is linked to the proprietary Armor US Equity Index.

The index allocates portfolio capital amongst the GICS-defined sectors of the US equity market.

These sectors include consumer discretionary, consumer staples, energy, financials, healthcare, industrials, information technology, materials, real estate, telecommunications services, and utilities.

Sector allocation is driven by Armor’s proprietary market performance indicator (MPI) which aims to identify sectors that are likely to offer strong, long-term performance with lower expected downside risk.

Sectors that are chosen by the MPI are equally weighted within the index which is reconstituted and rebalanced on a monthly basis. If no sector appears attractive based on the MPI’s results, the index will shift its entire allocation into mid-term US Treasuries.

The fund is structured as an ETF-of-ETFs, investing in unaffiliated ETFs providing exposure to individual GICS-defined sectors of the US equity market. Currently, the fund is using Vanguard sector ETFs for this purpose due to their low-cost and robust liquidity.

Each underlying Vanguard ETF is linked to an MSCI index that covers sector representation across the large, mid, and small-cap segments of the US equity market. The largest constituent is capped at 25% and the sum of all weights above 5% is capped at 50%.

The Armor ETF comes with an expense ratio of 0.60% which includes a 0.50% management fee and 0.10% in fees associated with acquiring the underlying Vanguard ETFs.

According to Armor, the disciplined strategy underpinning the ETF is designed to help investors avoid losses by preventing irrational decisions in the face of volatile markets. The fund may suit investors looking for a defensive US equity investment as well as those seeking exposure to the low volatility factor.

Jim Colquitt, Founder of Armor Indexes, commented, “Whether it is in equity or credit, one facet of investor behavior that doesn’t change is the tendency for key investment decisions to be influenced by fear and greed. Greed tends to keep investors overexposed to the markets when they should be paring positions, while fear can keep them out of the markets just when key turnarounds take place. It’s why the long-term performance of many investment categories is so strong, while the long-term performance of so many investors is not.”

Colquitt continued, “With the current bull market for US equities now in its second decade, investors are in uncharted territory. It’s only prudent that many will be thinking about how their portfolios will respond when the inevitable downturn arrives. For investors, protecting against downside risk should be paramount; and for advisors, explaining to clients how you can help them protect against downside risk is going to be an important, and recurring, conversation in 2020.”

Garrett Stevens, CEO of Exchange Traded Concepts, added, “We could not be happier to be teaming up with Armor to bring ARMR to the marketplace. This solution is a strong building block for investors looking for potential ways to protect their equity portfolios against future downturns, and it comes at a time when valuations are stretched, volatility is making an extended reappearance, and a 10-year bull market run may be showing signs of slowing down. All of this makes ARMR an important new entry to the ETF landscape and one we’re proud to be a part of.”

The fund is likely to compete against the actively managed Day Hagan/Ned Davis Research Smart Sector ETF (SSUS US) which launched on NYSE Arca last month. Brought to market through a partnership between Day Hagan Asset Management and Ned Davis Research, the fund harnesses the latter’s proprietary equity models to provide risk-managed exposure to a US sector rotation strategy based on GICS-defined sectors of the S&P 500. It comes with an expense ratio of 0.78%.