Little Harbor Advisors has launched a new active ETF providing risk-managed exposure to the Nasdaq 100.
Volatility in the Nasdaq 100 has notably increased thus far in 2022.
The LHA Market State Tactical Q ETF (MSTQ US) has been listed on Cboe BZX Exchange with an expense ratio of 1.15%.
Considered the world’s most pre-eminent growth index, the Nasdaq 100 consists of 100 of the largest US and international non-financial companies by market capitalization listed on the Nasdaq Stock Market, subject to various diversification requirements.
It reflects companies across major industry groups including computer hardware and software, communications, retail/wholesale trade, and biotechnology.
The Nasdaq 100 has soared in the past two years as the index’s technology and technology-enabled constituents prospered in the post-Covid economy – the $190 billion Invesco QQQ Trust (QQQ US), the largest ETF globally to track the Nasdaq 100, rose 135.1% from the market’s pandemic low on 23 March 2020 to the end of December 2021.
QQQ’s performance in 2022 has been drastically different, however. The ETF fell as much as 20.8% (as of 14 March) but has since recovered somewhat and is currently down 11.1% year-to-date (21 March). Notably, QQQ’s one-year rolling volatility has climbed from 18.5% to 20.8% so far this year.
Amid this uncertain environment, the LHA Market State Tactical Q ETF may appeal to investors who wish to remain exposed to high-growth equities while taking steps to buffer against rising volatility and potential drawdowns.
The fund’s baseline exposure is a 100% allocation to the Nasdaq 100 which is enacted through investing in QQQ or Nasdaq 100 index futures.
The ETF incorporates a risk management overlay driven by proprietary statistical analysis of the Cboe Volatility Index, also known as the VIX Index, conducted by LHA’s affiliate Thompson Capital Management.
The VIX represents the implied volatility of US equities derived from option pricing on the S&P 500 and is a measure of the market’s expectation of stock market volatility over a specific time frame. As all of the largest stocks in the Nasdaq 100 are also constituents of the S&P 500, the VIX acts as a strong proxy for volatility signals in the Nasdaq 100.
Thompson Capital Management seeks to estimate the direction and magnitude of US equity market volatility by comparing volatility expectations across short-term and long-term periods, as expressed by 30-day and 90-day VIX indices.
When the model indicates that short-term volatility is increasing, the fund will seek protection against falling markets by lowering long Nasdaq 100 exposure and also investing long in VIX-linked instruments as a hedge.
According to the ETF’s prospectus, the fund may also opportunistically write covered calls on its Nasdaq 100 positions in a bid to increase income through the collection of call premiums.