A New Active ETF Tries to Improve on Modern Portfolio Theory
Virtus Investment Partners (VRTS) partnered with iSectors to launch an actively managed exchange traded fund that promises to track a type of next-gen modern portfolio theory approach.
On Wednesday, iSectors rolled out its flagship iSectors Post-MPT Growth ETF (PMPT) . PMPT has a 1.55% total expense ratio.
The newly launched PMPT is categorized as a liquid alternative based on the the firm’s flagship investment model, the iSectors Post-MPT Growth Allocation. The underlying actively managed investment model tries to improve upon the principles of Modern Portfolio Theory by applying modern research and technology.
Modern Portfolio Theory assumes that investors are risk averse, markets are efficient and the allocation of an investment portfolio is more important than individual security selection. MPT favors long-term investing, diversification that seeks an asset allocation with the highest return per any given level of risk.
“Based on investment research published post-1959, Post-MPT seeks to enhance how MPT principles are applied,” according to the prospectus sheet. “In addition considered by a traditional MPT advisor, the Sub-Adviser’s proprietary Post-MPT model also takes into account mothly changes in more than a dozen capital market and economic factors.”
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The dozen relevant capital market and economic factors, including interest rates, money supply, inflation and unemployment rates, are used to maintain an optimal portfolio allocation that could help the portfolio navigate economic and market changes.
The enhanced portfolio will follow a monthly re-optimization or re-allocation to bring the fund holdings in line with its strategy and will remain fully invested across all market cycles.
“Today’s sophisticated investors understand the need for a more comprehensive approach to their investments, one that aims to perform well in both up- and down markets,” iSectors’ founder and CEO, Vern Sumnicht, said in a press release. Traditionally, investors have been exposed to a buy and hold approach which limits portfolio diversification among highly correlated asset classes, and therefore fails to reduce risk as expected. PMPT diversifies its portfolio among low-correlated asset classes with the goal of minimizing risk, especially in a down market.”
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The underlying portfolio will include assets ranging from nine low-correlated areas, including basic materials, bonds, energy, financials, gold, health care, real estate, technology and utilities to generate greater diversification. The fund will also act as a sort of fund-of-funds, only gaining market exposure through other ETFs.
Currently, its top holdings include the VanEck Vectors Gold Miners ETF (GDX) 16.6%, iShares 20+ Year Treasury Bond ETF (TLT) 16.5% and Vanguard REIT ETF (VNQ) 14.6%.
Chuck Self, Chief Investment Officer of iSectors, also pointed out that the iSectors PMPT Growth ETF is primarily targeted toward risk-averse investors whom are seeking downturn protection while still maintaing exposure to possible market gains.
For more information on new fund products, visit our new ETFs category.
