Howard Capital Management (HCM) has become the latest investment advisor to issue ETFs with the launch of two funds providing downside risk management relative to the US large-cap equity universe.
The funds provide downside protection by shifting all or part of their exposure to short-term US Treasuries when the outlook for the equity market is unfavorable.
The funds, which have listed on NYSE Arca, are the HCM Defender 100 Index ETF (QQH US) and HCM Defender 500 Index ETF (LGH US).
The ETFs track proprietary indices that are guided by the firm’s quantitative investment model, HCM-BuyLine.
The model uses trend analysis to determine when the funds should be fully invested in equities and when exposure should be pared back.
The methodology of the model has not been disclosed but HCM has indicated that it is broadly based upon the ratio of new highs to new lows in the equity market.
A ratio of many new highs to few new lows indicates a bull market and a risk-on approach. Conversely, a ratio of few new highs to many new lows indicates a bear market. Depending on the strength of the bear market indicator, the funds will shift all or part of their exposure to 1-3 month US Treasuries.
The HCM Defender 100 Index ETF is linked to the HCM 100 Index which dynamically shifts its allocation between the Solactive US Technology 100 Index (a generic alternative to the technology-heavy Nasdaq 100) and the Solactive 1-3 month US T-Bill Index.
The HCM Defender 500 Index ETF tracks the HCM 500 Index which dynamically shifts its allocation between the Solactive US Large Cap Index (a generic alternative to the S&P 500) and the Solactive 1-3 month US T-Bill Index.
For both ETFs, the HCM-BuyLine model is the same and is based on the Solactive US Large Cap Index universe.
According to HCM, when the Solactive US Large Cap Index dips 3.5% below the HCM-BuyLine, the ETFs will assume a 50/50 position in equities and US Treasuries. If the Solactive US Large Cap Index drops to 6.5% below the HCM-BuyLine, the funds will shift to 100% US Treasuries.
Once the Solactive US Large Cap Index closes above the HCM-BuyLine for five consecutive trading days after having dropped below one or both of the previous two levels, the funds will reinvest 100% in equities.
Vance Howard, CEO of Howard Capital Management, commented, “We are taking indexing to a whole new level with our HCM Defender Series ETFs. The need for speed in reacting to shortened trends prompted us to modernize our HCM-BuyLine for index funds so it has the potential to react much quicker in retreating from, and re-entering into, the market.”
The ETFs come with expense ratios of 1.25%.