First Asset has launched the First Asset US TrendLeaders Index ETF (SID) on the Toronto Stock Exchange, offering exposure to a portfolio of US equities selected due to the strength of their recent price trends.
The CIBC US TrendLeaders Index evaluates up to 12 factors relating to price momentum or trend.
Rohit Mehta, President of First Asset Investment Management, commented: “First Asset is dedicated to active strategies, be they ETFs managed on a discretionary basis by a portfolio management team, or ETFs based on active smart beta indices. Consistent with this focus, we’re pleased to launch the First Asset USTrendLeaders Index ETF, capitalizing on the work of chartered market technician and executive director CIBC World Markets, Sid Mokhtari. Sid and his team have developed a trend-following model designed to consistently position investors in the best opportunities the US equity market has to offer.”
Sid Mokhtari developed the CIBC TrendLeaders Matrix in 2008. It serves as a mechanical trend model designed to provide institutional investors with an objective and systematic multifactor-driven stock allocation methodology. The model evaluates up to 12 factors related to price momentum including relative strength, moving average, moving average convergence-divergence, directional movement, stochastics and rate of change (amongst others).
The ETF tracks the CIBC US TrendLeaders Index which employs a proprietary rules-based model developed by CIBC World Markets. The index systematically selects and ranks securities from the Solactive US Large and Mid Cap Index based on the duration and longevity of underlying trend-strengths and incorporates an objective quantitative filter for technical factors.
The index is reconstituted and rebalanced monthly in order to remove constituents with weakening or stagnating trend scores and replace with a new set of higher trend-scoring constituents.
The theory driving the fund is based on the empirical evidence that equity securities with the highest trend scores will continue to generate better absolute and relative returns on a more frequent basis and will undergo different cycles of mean-reversion, mostly tied to the duration of the period during which the trend factors are expanding or contracting.
Investors are indeed trend chasers regarding stock movements, continuing to buy as the stock price increases and sell as it decreases. Some investor traits that have been identified through the study of behavioural finance may provide an explanation.
Investors tend to anchor themselves to perceptions of stock value, responding slowly to new information contradicting their valuations. Also, investors wish to avoid the regret of mistiming the market. In this case they may hold the stock longer than is prudent, not wishing to sell early and miss out on potential returns. Due to these factors, these strategies have historically provided superior returns when compared to broad market cap-weighted equity indices.
The underlying methodology favours robust exposure to sectors with strong current price trends over ensuring diversification. As of the end of June, the index had a whopping 50% allocation to the information sector, a 19% allocation to the healthcare sector and a 18% allocation to the consumer discretionary sector. There are 50 holdings in the fund with the largest exposure being XPO Logistics (2.5%).
The ETF also has a built-in currency hedge which mitigates the risk of movements between the US dollar and Canadian dollar from negatively impacting returns.
SID has an annual management fee of 0.75%.