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Market-Neutral ETF Targets Sector Rotation Strategy

tlydon@globaltrend.com (Tom Lydon)

ETFs that mimic hedge-fund strategies are on the cutting edge but so far this innovative portion of the business hasn’t attracted much in the way of assets.

There are several complex ETFs that employ so-called market-neutral or long-short strategies.

One interesting example is AdvisorShares Rockledge SectorSAM ETF (SSAM).

The fund is relatively small with only $2.5 million in assets under management. Some investors may be turned off by the 1.5% expense ratio. That’s high for an ETF but the fund is actively managed and is more complex than plain-vanilla index-tracking portfolios.

The ETF’s subadvisor Rockledge Advisors has been around since 2004. [AdvisorShares Launches Active ETF]

Rockledge uses a quantitative strategy that goes long the sectors it sees as most attractive, and shorts the sectors with the weakest outlooks. The underlying holdings are comprised of the sector SPDR ETFs managed by State Street Global Advisors.

“It’s a hedge fund strategy in a retail product,” said Alex Gurvich, managing partner and portfolio manager at Rockledge, in a recent telephone interview. [AdvisorShares to List Long-Short ETF]

“Alternative investing is important because institutional investors are looking for non-correlated assets,” he added.

The ETF tries to limit volatility with a “dollar-neutral” strategy. In other words, the long and short positions are typically equal so they offset.

The fund rebalances at least once a month so turnover is higher than most index-tracking ETFs. From a tax perspective, the trading activity may also trigger capital-gains distributions

“SSAM employs an actively managed, market-neutral sector rotation strategy and seeks to generate stable and consistent annual returns under different market conditions,” writes Morningstar analyst Patricia Oey in a report on the ETF.

“We think SSAM is suitable as a satellite investment as part of an alternative allocation. Since it is a dollar-neutral portfolio, we expect it to be less volatile than, and less correlated to, the overall market,” she said, adding that market-neutral strategies lag during market rallies.

Still, the ETF may appeal to risk-averse investors with a focus on capital preservation and diversification.

Oey notes there are two other fundamentals-based, market-neutral exchange traded products: ProShares RAFI Long/Short (RALS) and Credit Suisse Market Neutral Global Equity ETN (CSMN).

“Investors can also consider QuantShares’ suite of market-neutral ETFs that target a specific factor, such as beta and size,” she wrote. [Market Neutral ETF Outperforming in 2012]