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How Vesper Capital's UTRN ETF utilizes a short-term 'buy the dip' strategy

John Thompson, President of Vesper Capital, joined Yahoo Finance's Jen Rogers, Myles Udland, Dan Roberts, and Melody Hahm to discuss the firm's UTRN ETF and its investment strategy.

Video Transcript

MYLES UDLAND: All right, welcome back to "Yahoo Finance Live." Myles Udland here in New York. We are joined now by John Thompson-- he is the president of Vesper Capital-- and talking about his new ETF UTRN, U-T-R-N, basically looking at a way to play the names that have been beaten down and could snap back here as this market continues to repair itself after that huge sell-off we saw in March.

So John, I guess just thinking about the strategy, and how you've gone about picking the names that are in this fund right now, what's the criteria here? Is it just, this is a stock that's gotten absolutely crushed and could snap back? How are you sorting through the mess?

JOHN THOMSON: You know, Myles, it's all based on short-term reversal. The idea of capitalizing on investor overreaction caused by fear and greed. Short-term reversal's been written about research for the better part of the last 50 years, and our strategy specifically is developed by Dr. Victor Chow, PhD Finance, CFA, distinguished professor at West Virginia University.

And we look to identify 25 S&P 500 stocks every week that have the best chance to experience a short-term reversal. And all this is vetted out by a ratio that Dr. Chow created called the Chow ratio, kind of similar to the Sharpe ratio, in identifying these names that have been beaten down, as you said, Myles, and have the best chance of experiencing reversal.

MYLES UDLAND: And so when you're putting together this portfolio, is this essentially stops, right? You're saying, OK, this stock at price x is likely to bounce, whether it's 20%, 30%, 40%, depending on how oversold it's been. Is it-- at least as you guys see it-- a fairly mechanical and methodical walk-through of, here are all the names that have gotten their teeth kicked in, and it's likely that we see some sort of rebound to a level that's lower than it was, but is normalized, essentially, off its prior level.

JOHN THOMSON: Yeah, it's really an interesting strategy in that we take the Chow ratio and apply it to every single stock inside the S&P 500 on a weekly basis. And based on the evaluations of the Chow ratio, it identifies-- like I said-- 25 S&P 500 stocks that have the best chance of experiencing a reversal. So it's a dynamic approach. It's not like your conventional buy-and-hold strategies.

And consequently, over the last month, it's taken us all over the map. We've been in and out of the airlines, in and out of the hotels, the financials, the oils, the consumer discretionary, technology stocks, et cetera. And it thrives on volatility, as you would expect. Essentially, earlier this year, when we were in a lower volatility melt-up period, strategy's not going to perform as well. But when things got crazy in the middle of March, and we saw all sorts of volatility and reversals, the fund itself I think was up over 50% off the bottom relative to the S&P, which I think it was only up around 30.

JEN ROGERS: John, as you just said, it's not your classic buy-and-hold strategy. How do you think about this strategy fitting into a portfolio? Who should be using it? How long do you hold it? When do you get in?

JOHN THOMSON: Yeah, Jen. An awful lot of moving parts to this, it sounds like. But the reality of it is is we look at it as a long-term strategy. It all comes as a result of-- I've been in the business 33 years. And especially over the last 10 to 15 years, I've seen how difficult it's been for more of the fundamental large cap strategies to add any value to the S&P 500. And to that end, when I collaborated with Dr. Chow on what essentially is a behavioral-based strategy-- based on human emotion, fear and greed-- it seemed like a better way to potentially add that value that a lot of other traditional managers haven't been able to.

MYLES UDLAND: All right. John Thompson, President of Vesper Capital. Fund's U-T-R-N. Got a great name, I'll give you that, John. Thanks for joining the program. We'll talk to you soon.

JOHN THOMSON: MYLES, I really appreciate it. Thanks, you guys.

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