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This article was originally published on ETFTrends.com.
It's often said that timing the market is near impossible, and investors not privy to the notion found out the hard way this week when a tariff truce between U.S. President Donald Trump and Xi Jinping suggested that a year-end rally would ensue. Of course, Monday's 288-point gain after the news broke was followed by Tuesday's 799-point decline in the Dow Jones Industrial Average, but for funds like VanEck Vectors NDR CMG Long/Flat Allocation ETF (LFEQ) , it knew where to allocate its capital as U.S. equities experienced an unceremonious drop.
"LFEQ reduced its equity exposure from 100% to 80% today," said Ed Lopez, Head of ETF Products at VanEck, as the Dow fell as much as 800 points on Tuesday.
LFEQ provides investors with an investment solution that utilizes a systematic approach to preserve capital by increasing cash when the markets suggest weakness and reallocating capital into equities whenever it identifies uptrends. LFEQ accomplishes this by mimicking the performance of the Ned Davis Research CMG US Large Cap Long/Flat Index, which follows trade signals that dictates the portfolio’s equity allocation ranging from 100% fully invested or “long” S&P 500 exposure to 100% in cash or “flat” Solactive 13-week U.S. T-Bills.
The index itself uses a proprietary methodology that determines when to allocate capital into equities or seek safe-havens in Treasury bills based on the current market environment. In essence, LFEQ has a risk management component built into the ETF that gives investors peace of mind when the markets are oscillating with volatility.
"The model applies seven different indicators at each of the industry levels to get a sense of the overall trend," said Lopez. "It pieces that together to come up with a composite."
That composite is what VanEck refers to as market breadth. As opposed to using a technical indicator, such as the 200-day moving average, market breadth provides LFEQ with a more focused approach of what the markets are doing via advancing and declining price trends or countertrends to gauge overall market health.
"Market breadth gives an honest sense of where the market is going," said Lopez.
The index’s model follows a two-step process--the first step measures trend following and mean reversion within the S&P 500 industry groupings to determine a bullish or bearish market environment. Additionally, the model applies a risk filter process to ensure that all of the price-based industry level indicators are effective over time.
The second step calculates the scores taken from the first phase to produce the equity allocations of the index. When the index is not completely long or flat, either 80% or 40% of the portfolio will be allocated to the S&P 500, with the remainder allocated to the Solactive 13-week U.S. T-bill Index.
"It (LFEQ) tries to avoid those major market downturns, but give you the ability to participate in a meaningful way on any equity upside," said Lopez.
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