XLB Materials Select Sector

Choppy markets and an uncertain outlook have pushed many investors to seek more active methods in their investing strategies. While the majority of the investors playing these trends stay in the mutual fund space, a number of them have begun to cross over into the ETF world, and for good reason. Active ETFs offer investors the same watchful eye of a manager but can often do so at a much cheaper cost. Furthermore, ETFs offer investors the chance to see what the holdings are in their fund on a daily basis and to sell and buy shares throughout a trading session, increasing flexibility and transparency. Thanks to these advantages, assets in the active ETF space are slowly marching higher while a number of issuers continue to add more choices in this increasingly diverse space (also read HDGE: The Active Bear ETF Under The Microscope).  

This trend looks to continue into 2012 as well, as AdvisorShares announced the first active ETF launch of the new year. In this debut, the Maryland-based issuer best known for its array of actively managed ETFs, revealed further expansion of its lineup with the Rockledge SectorSAM ETF (SSAM). This brand new fund looks to give investors a different way to play the U.S. market with the objective of outperforming the S&P 500 Index. Below, we take a closer look inside this fund and how it looks to accomplish its objective for investors:

SSAM ETF In Focus

This fund looks to beat the market with a dollar neutral portfolio by investing in highly liquid sector ETFs. In essence, the fund will, in equal dollar amounts, go long in some sector ETFs and go short in others, with the goal of having the long sectors rise and the short sectors fall. This technique could give investors a lower volatility play on the market, or at least be a lower correlation bet on the equity world. It is also important to note that the fund will only target sector ETFs that focus on large cap U.S. stocks, suggesting that liquidity of the underlying will likely be high but the diversification-across market cap levels and countries—will be low to non-existent (see Three Outperforming Active ETFs).

The sector ETF weightings are chosen for the fund based on proprietary quantitative analysis from Rockledge in what the company calls its ‘Sector Scoring and Allocation Methodology’ or SectorSAM. This technique provides for individual sector forecasts through an analysis of over two hundred fundamental, macroeconomic and technical factors that influence individual stock returns. With these factors in hand, the portfolio manager then utilizes these statistics to select which undervalued sectors to buy and which overvalued ones to sell short. Currently, the fund has heavy long exposure to materials (XLB), technology (XLK) and energy (XLE), while short exposure is focused on financials (XLF), consumer staples (XLP) and health care (XLV) (see Ten Best New ETFs of 2011).

“The U.S. economy goes through various growth cycles, which means there should be relative sector variation at all times. We rotate investments between the U.S. economic sectors based on our proprietary evaluation in order to try and outperform the overall market.” said Alex Gurvich, Co-Founder of Rockledge and portfolio manager of SSAM. “We believe that the prudent investor, who understands the risk vs. reward tradeoff, should be looking at sector investing vs. individual stocks. Holding a position in a sector can provide inherent diversification while reducing individual company risk."

Competition

The active space is still pretty sparse on the ETF front but the product could see some competition from a few established funds. This could be especially true of the ETPs in the long/short category, of which there are currently 13 products.  Luckily for SSAM, most of these funds have a different focus than U.S. large caps and the ones that have a similar objective accomplish it in other ways. For example, QLT is neutral in each sector giving an equal allocation to both long and short sides in an industry. The goal is to pick top securities in each space, a strategy that represents a more ‘bottom up’ approach rather than SSAM’s ‘top down’ style (see Does Your Portfolio Need A Hedge Fund ETF?).

Additionally, in this group, no one fund has established much of a lead as the current top dog, CSLS, has just $31 million in AUM. This suggests that if SSAM can generate some alpha, and convince investors to buy in despite the 1.5% total expense ratio, the product could see some inflows. Overall, SSAM’s methodology seems pretty solid, and those looking for a lower volatility play on the U.S. large cap market could be well served by taking a closer look at this fund for their portfolios (also read Five ETFs to Buy in 2012).

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