Syntax debuts with risk-stratified US equity ETF

Jan 9th, 2019 | By | Category: Equities

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Newcomer Syntax Advisors has launched the Syntax Stratified LargeCap ETF (SSPY US) on NYSE Arca.

Rory Riggs, Founder and CEO, Syntax Advisors

Rory Riggs, Founder and CEO, Syntax Advisors.

The fund tracks the Syntax Stratified LargeCap Index, a smart beta index consisting of S&P 500 constituents that have been organized into different buckets based on the firm’s patented business classification system.

The index organizes companies that share related business risks into functional groups and weights these groups so as to spread exposure across these underlying risks.

According to the fund’s prospectus, this organizational structure translates into eight unconventional sectors: consumer, energy, financials, food, health care, industrials, information and information tools. Companies are “equally allocated” across these sectors and rebalancing occurs on a quarterly schedule.

According to Syntax, this weighting methodology allows investors to better diversify their exposure across the US large-cap opportunity set as opposed to concentrating portfolio risk in the companies with the largest capitalizations.

“The breakthrough of the Stratified LargeCap ETF is that an investor can now own a passively managed portfolio of the same companies as the S&P 500 but using a weighting methodology designed to maintain diversified exposures to related business risks,” said Rory Riggs, Founder and CEO of Syntax Advisors. “This is a first in a low-cost, passively managed ETF.”

Riggs continued, “We built a new classification system that lets us identify and map related business risk. Syntax believes that managing business risks should be an essential part of any investor’s risk strategy. Companies with similar business characteristics (i.e. same products, customers, suppliers, regulatory environment, and others) should react similarly when shocks hit the equity markets. The key to risk management is to maintain a diversified exposure to related business risk.”

Highlighting the extent to which traditional cap-weighted indices may concentrate portfolio risk, Syntax notes that the top ten names in the S&P 500 accounted for 21% of the index’s total exposure at year-end 2018. Most of these firms were from the technology sector which experienced the brunt of the US equity market correction that occurred at the end of 2018.

In contrast, the current largest constituent in the fund is Yum! Brands with a weight of just 0.8%.

The ETF started trading on 4 January from an existing private fund vehicle, thereby launching with four years of live performance history and assets under management of approximately $40 million.

It comes with an expense ratio of 0.30% due to a contractual fee waiver in place until at least October 2019. The fund’s gross expense ratio is 0.45%.

Syntax’s indexing division has also developed stratified weight indices for the US mid-cap, international developed, and US sector equity markets.

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