Day Hagan Asset Management and Ned Davis Research have co-developed an ETF which harnesses the latter’s proprietary equity models to provide exposure to a risk-managed US sector rotation strategy.
Brian Sanborn, Vice President of Investment Solutions at Ned Davis Research.
The Day Hagan/Ned Davis Research Smart Sector ETF (SSUS US) has listed on NYSE Arca and comes with an expense ratio of 0.78%.
The fund is actively managed and structured as an ETF-of-ETFs, investing in unaffiliated ETFs providing exposure to individual GICS-defined sectors of the S&P 500.
These sectors include consumer discretionary, consumer staples, energy, financials, healthcare, industrials, information technology, materials, real estate, telecommunications services, and utilities.
Allocation to the sector ETFs is driven by the Ned Davis US Sector Model which combines price-based, economic, fundamental, and behavioural indicators to estimate the probability of each sector outperforming the S&P 500.
The strategy overweights sectors with the highest probability of success while underweighting sectors with little or no support from the model. The fund’s prospectus notes the ETF may allocate more than 25% of its assets to any one sector.
The ETF also incorporates a risk management model, based on technical, monetary, economic, valuation, and sentiment indicators, which helps to define the overall equity allocation target.
When the majority of indicators are bullish, the fund is expected to be predominantly exposed to the S&P 500 sector ETFs; however, if the model indicates a low reward-to-risk ratio, the fund may reduce its equity exposure by as much as 50%. The ETF will allocate to cash and cash equivalents or will utilize derivative securities designed to hedge net equity exposure.
Portfolio rebalancing will typically occur on a monthly schedule.
Arthur Day, co-Founder and Senior Portfolio Manager at Day Hagan, commented, “We’re excited to partner with Ned Davis Research to launch the first of many ETFs. While our clients have benefited from NDR’s Smart Sector models in our separately managed accounts, we’ve seen strong demand for a similar strategy in an ETF wrapper. We expect to bring to market additional co-developed funds later this year.”
Brian Sanborn, Vice President of Investment Solutions at Ned Davis Research, added, “Many tactical allocation models rely on just one type of analysis for their allocation and timing decisions, which could increase the risk of losses during different market regimes. There are over 100 diverse indicators in our sector models, which we think provides a more holistic approach. As we face an increasingly aging bull market, we think a strategy like SSUS could make a lot of sense for investors.”