Vesper Capital debuts with short-term reversal strategy ETF

Sep 21st, 2018 | By | Category: Equities

Vesper Capital Management has become the latest player to enter the ETF arena with the launch of the Vesper US Large Cap Short-Term Reversal Strategy ETF (UTRN US) on NYSE Arca.

Vesper Short-term reversal ETF

The fund seeks to capture returns from stocks that have recently dipped in value but are expected to make a rapid comeback.

Brought to market in partnership with white-label ETF platform Exchange Traded Concepts, UTRN tracks a relatively concentrated portfolio of S&P 500 stocks that Vesper believes are about to benefit from a short-term reversal.

A short-term reversal is a trading anomaly whereby stocks that have experienced sharp, short-term declines tend to quickly bounce back or rebound.

The ETF is the first to offer access to such a short-term contrarian strategy.

The firm highlights that the trading anomaly is understood to occur due to investors overreacting to recent negative news that leads to stock prices being driven down disproportionally and temporarily.

“If investors overreact to new information, and if that overreaction is consistent, then it may be possible to construct trading strategies to benefit from this behaviour,“ said Victor Chow, Senior Investment Consultant at Vesper Capital Management.

Vesper cites example triggers such as company being called to Washington D.C. to testify to a Grand Jury, unplanned succession news, sexual harassment claims against a senior executive, product recalls, or a Twitter storm involving the company.

But overreactions can also occur at a more macro level whereby whole sectors or stock markets are dragged down by negative news such as interest rate hikes, oil price volatility, war, global trade weakness, and geopolitical changes.

Vesper notes, however, that not all companies in a sector are equal as some with stronger fundamentals are better able to withstand the storm than others.

This is why the firm applies a proprietary methodology – dubbed the Chow Ratio – to identify those firms most likely to experience a weekly rebound. The Chow ratio combines short-term pricing and volatility data with metrics assessing fundamental soundness.

The ratio is the engine driving the selection process of the fund’s underlying index, the Vesper US Large Cap Short-Term Reversal Index, which is calculated by S&P Dow Jones Indexes.

The methodology ranks stocks in the S&P 500 based on the Chow Ratio, choosing 25 stocks with the most attractive ratio scores for inclusion in the index each week. A stock is only removed from the portfolio on rebalancing if another stock has a lower value.

The nature of the strategy suggests the fund is likely to contain above-average risk with the potential for high alpha generation.

The index has a very high-turnover, replacing approximately 80% of its portfolio on a weekly basis. Vesper notes, however, that the high liquidity of the underlying S&P 500 constituents as well as the liquidity of ETF structure help to contain trading costs within the strategy.

The fund comes with an expense ratio of 0.75%.

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