Alpha Architect launches sentiment-driven asset allocation ETF

May 31st, 2022 | By | Category: Alternatives / Multi-Asset

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Alpha Architect has launched a new actively managed ETF that tactically allocates across asset classes based on indicators of relative sentiment between institutional and retail investors.

Alpha Architect launches sentiment-driven asset allocation ETF

The ETF’s asset allocation is driven by indicators of relative sentiment between institutional and retail investors.

The Relative Sentiment Tactical Allocation ETF (MOOD US) has been listed on NYSE Arca with an expense ratio of 0.71%.

The fund utilizes low-cost, liquid ETFs offered by BlackRock or Vanguard to gain exposure to broad market US equities, developed ex-US equities, high-quality bonds from multiple sectors, and gold.

Alpha Architect first determines the ETF’s equity allocation based on the average of four relative sentiment indicators, each of which can range from 0% (extreme bearishness) to 100% (extreme bullishness).

The ‘Position-Based’ relative sentiment indicator analyses the relative holdings of institutional and retail investors in equities, long-duration bonds, and along the yield curve. Generally speaking, if institutional investors are allocating more to equities than their historical average, and retail investors are allocating less to equities than their historical average, the indicator suggests a larger allocation to equities.

The ’Survey-Based’ relative sentiment indicator harnesses machine learning capabilities to analyze monthly survey results from institutional and retail investors regarding their outlook for the economic health of the US, Europe, Japan, and Asia ex-Japan. In a similar fashion as the ‘Position-Based’ indicator, this indicator uses the relative sentiment of these two investor groups to suggest an allocation between US equities and equities listed in developed markets outside of the US.

The ’Cross-Asset’ relative sentiment indicator estimates the relative sentiment of equities indirectly via the relative sentiment of non-equity assets (such as certain bonds, currencies, and commodities) that have historically been highly correlated to equities. For example, bullish relative sentiment in natural gas has typically been bullish for equities.

The ‘Retail Macro’ sentiment indicator measures the sentiment of retail investors on various commodities that are generally correlated with growth and inflation. When retail investors are very bullish on these commodities, it suggests inflationary pressures are rising. If retail investors are very bearish on these commodities, it suggests deflationary pressures are rising. Equities have tended to do poorly in both cases. Therefore, if retail investor sentiment toward these commodities is neither too hot nor too cold, the indicator will suggest a larger allocation to equities.

Once Alpha Architect has determined the ETF’s equity allocation, it will allocate the remainder of the fund’s portfolio to ETFs providing exposure to high-quality bonds and gold.

The ETF’s gold allocation will generally equal the fund’s allocation to bonds, up to a maximum of 20%. The ETF will have greater gold exposure if position-based relative sentiment in the US dollar is bearish and if real 10-year interest rates have been declining over recent weeks.

The ETF will also allocate a maximum of 20% of its assets to gold if the fund’s equity allocation is less than 50%.

The ETF’s fixed income sleeve, meanwhile, has a baseline allocation to ETFs providing investment-grade US dollar-denominated aggregate bond exposure. The ETF will, however, also allocate to ETFs providing exposure to US Treasury Inflation-Protected Securities based on the degree of retail macro sentiment in commodities which, as described above, is reflective of inflationary or deflationary pressures.

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