New Age Alpha, an asset manager based in Rye, New York, has made its ETF debut with the launch of a duo of US equity funds that seek to avoid overpriced stocks caused by human biases.
Julian Koski, co-Founder and CIO at New Age Alpha.
The AVDR US LargeCap Leading ETF (AVDR US) and AVDR US LargeCap ESG ETF (AVDG US) – styled ‘Avoider ETFs’ – seek to provide a source of alpha and uncorrelated return by avoiding losers, with the latter fund also integrating sustainability considerations.
Tracking the New Age Alpha US Large-Cap Leading 50 Index and New Age Alpha US Large-Cap ESG Index respectively, the funds employ a proprietary risk management approach to exclude stocks that are considered likely to decline in the future.
The approach utilizes inputs from different valuation models, such as revenue, earnings, cash flow, and multiples, to estimate the probability that a company will fail to deliver the revenue growth implied by its valuation.
New Age Alpha calls this the ‘Human Factor’, contending that it occurs when investors impound vague or ambiguous information into stock prices.
The funds
AVDR’s underlying index, the New Age Alpha US Large-Cap Leading 50 Index, selects 50 stocks with the lowest Human Factor scores from the S&P 500 with a maximum of 20 companies chosen from any one sector. Constituents are weighted by the inverse of their Human Factor scores while capping any sector exposure at 3% above its weight in the S&P 500.
The index is reconstituted and rebalanced on a quarterly basis in February, May, August, and November. There are no buffer rules for the November rebalance; however, during the other reviews, a stock may only be removed if its Human Factor score has risen above the median Human Factor score for the S&P 500.
Sector weights are broadly similar to the S&P 500 with the largest exposures being information technology (26.2%), industrials (13.0%), financials (13.0%), health care (12.0%), and communication services (10.3%). The index is diversified at the stock level with the largest constituent being Occidental Petroleum at 2.6%.
AVDG’s underlying index, the New Age Alpha US Large-Cap ESG Index, starts with an expanded universe comprising the 600 largest stocks listed in the US. Companies that have a Refinitiv ESG rating below 75 (Grade A-) are removed. The remaining constituents are ranked based on a combination of an ESG score and their Human Factor score (those with lower Human Factor scores are ranked higher) and the 50 highest-ranked stocks are selected.
Constituents are weighted by float-adjusted market capitalization subject to a cap of 15% per stock. The index is rebalanced on a quarterly basis with similar buffer rules as described above.
More than half of the index weight is allocated to information technology (32.0%) and consumer discretionary (20.5%) stocks while there is also significant exposure to the financials (17.0%) and consumer staples (15.5%) sectors. Both Microsoft and Amazon have reached the cap of 15%, while the next largest constituents are Walmart (7.0%), JP Morgan (6.5%), and Nvidia (5.5%).
‘Next wave of innovation’
Julian Koski, co-Founder and CIO at New Age Alpha, commented, “In today’s environment, investors seek tools that see beyond beta exposure and complicated thematic strategies. AVDR and AVDG represent the next wave of innovation in alpha-seeking ETFs by combining the alpha potential of active management with the advantages of rules-based investing.
“We are excited to offer the Avoider ETFs alongside our full scope of portfolio solutions and tools that help advisors, institutions, and investors build better portfolios.”
The ETFs have listed on Cboe BZX Exchange and come with expense ratios of 0.60%.