Global X Funds has launched the Global X Adaptive US Factor ETF (AUSF US) on NYSE Arca. The fund provides exposure to US equities via a factor rotation strategy.
AUSF tracks the Adaptive Wealth Strategies US Factor Index, co-created with US registered investment advisor Carroll Financial Associates.
The index dynamically allocates between three US equity sub-indices that target returns attributable to the value, momentum, and minimum volatility factor risk premia.
Each sub-index consists of 100 US mid- and large-cap stocks that represent high exposure to a particular factor.
The fund’s index adjusts its factor exposures on a quarterly basis, utilizing a mean-reversion strategy that seeks to manage downside risk and outperform relative to market cap-weighted benchmarks.
Mean reversion strategies work on the assumption that there is an underlying stable trend in the price of an asset and prices fluctuate randomly around this trend. Values deviating far from the trend will tend to reverse direction and revert back to the trend.
At each quarterly rebalance, the index seeks to reduce or eliminate exposure to the most recent outperforming factor. It does this by analysing the annualized trailing two-year return for the sub-indices.
If the return difference between the best performing sub-index and the second best performing sub index is greater than 2%, the index will equally weight its entire exposure to the second and third best performing sub-indices.
If the return difference between the best performing sub-index and the second best performing sub index is less than 2%, the index will assign its exposure across all three sub-indices with a weighting of 40%-40%-20%, underweighting the best performing factor.
The goal is to own the factors that are overly stretched on the downside and avoid the ones that are overly stretched on the upside. This provides the opportunity for the under-performing factors to appreciate and hopefully avoid the factor that is about to fall.
“The lesson that we’ve learned keenly over the last year has been that market environments can change rapidly, leaving investors seeking dynamic strategies that can adjust to a changing landscape,” said Jay Jacobs, Head of Research and Strategy at Global X Funds. “In collaborating with Carroll Financial on AUSF, we’re excited to bring their client-first approach to market with a product that aims to help investors navigate uncertain markets.”
“We recognized that we could improve our adaptive factor strategy by combining minimum volatility, value, and momentum in one index,” added Kristopher Carroll, Chief Investment Officer at Carroll Financial Associates. “We have utilized a strategy of combining these three separate factors in private portfolios for many years, and are excited to now house it in one index, tracked by a single ETF. We are excited to provide this index to Global X so that it can be wrapped in an efficient structure and brought out to the broader market.”
AUSF comes with an expense ratio of 0.27%. Income generated within the portfolio is distributed to investors on a quarterly basis.