Exchange-traded fund (ETF) provider Global X Funds has launched two new ETFs on the NYSE Arca – the JP Morgan Efficiente Index ETF (EFFE) and the JP Morgan US Sector Rotator Index ETF (SCTO).
EFFE has the potential to dynamically allocate across a broad range of assets classes, and is intended to be a useful alternative investment seeking low volatility returns across a variety of market conditions.
The ETF’s index methodology seeks to apply modern portfolio theory to select the portfolio that would have had the highest return during the previous six months and an annual realised volatility level of 10 per cent or less.
EFFE allocates across five asset classes and 13 sub-classes to provide exposure to a broad range of investments. The index components and weights are rebalanced on a monthly basis to adapt to changing market conditions.
In rising markets, SCTO uses a sector rotation strategy, while in volatile or falling markets, the fund has the ability to shift partially or wholly into short term fixed income exposure. By combining these two strategies in one ETF, the fund seeks to intelligently participate in rising markets and defend assets in volatile or declining markets.
The fund rebalances on a monthly basis to provide exposure to a maximum of five US sectors that have demonstrated the strongest positive recent performance.
Sector exposure in the fund is weighted to balance volatility risk equally, meaning that allocations to high volatility sectors are scaled down relative to less volatile sectors.
If monthly sector allocation results in a portfolio that would have experienced greater than 20 per cent volatility, the fund will proportionately reduce exposure to sectors to fall below the 20 per cent realised volatility threshold.
In a market where all sectors are declining, the fund will transition 100 per cent of its exposure to the iShares 1-3 Year Treasury Bond ETF, seeking to defend assets against a declining market.
"We regularly hear about the need for investment vehicles that manage downside risk," says Greg King, executive vice-president at Global X Funds. "With these new funds, we can now offer two potential solutions to investors who want the liquidity and transparency of an ETF wrapper and a rules-based index approach."
"We are pleased to see the JP Morgan Efficiente and Sector Rotator indexes in ETF form with Global X as the ETF provider," says Scott Mitchell, managing director at JP Morgan.
