Vesper Capital’s UTRN ETF, a short-term contrarian strategy designed to buy on the dip, has enjoyed good performance over recent periods of market volatility, achieving outperformance of the S&P 500 Total Return Index by 495 basis points returning 20.97 per cent versus the S&P’s 16.02 per cent in the first quarter of 2019.
The ETF is ranked in the top 1 per cent of all large cap value funds, according to Morningstar.com.
The team behind the ETF includes Dr Victor Chow, inventor of the Chow Ratio, a proprietary algorithm that has been researched for over 30 years.
The theory is that investors tend to overreact to negative stock news, driving the stock price down temporarily. The Chow Ratio seeks to identify stocks better able to weather and rebound rapidly. The company writes that UTRN provides investors the opportunity to capitalise on this short-term reversal anomaly in an ETF wrapper. UTRN also recently received an award for “Best New Thematic ETF of the Year”.
John Thompson, President of Vesper Capital explains that their UTRN index was launched in July 2018 with S&P and the index goes back to the beginning of 2006.
Last September saw the launch of the ETF. “We launched a day after the top of the S&P 500,” Thompson says. “At first, we thought we were cursed in the midst of the first major downturn in 10 years but if you fast forward it was a blessing because not only have we experienced a dramatic downturn in the market in a fourth quarter, but also an impressive rebound so far this year.
“What better environment to see if your methodology will hold up.”
The ETF has just its launch assets of USD15 million and is aimed at independent financial advisers at the moment, as it doesn’t have the assets to attract the US wirehouse platforms as yet.
“But, in addition, because of the unique nature of the methodology and because we are one of the only ones out there doing this, we are presenting it to institutional investors, endowments, foundations and pension funds as a strategy diversifier,” Thompson says, pointing out that as most of these institutions have their biggest allocation to large cap equities. “If there is a strategy that can provide excess return, it is their job to find that.”
Chow explains that his methodology is based on the fact that behaviour bias causes market anomalies, usually a short-term reversal.
“My motivation was to develop a model or strategy that could identify some of the stocks that had a potential of reversal caused by human behavioural bias,” Chow says.
“I created the Chow Ratio which gives stocks a score which identifies some of the stock in the previous week that had over reacted to the downside so had a potential to rebound in the next week.”
His methodology doesn’t just capture short term reversals but also the effect of those reversals on the market.
“The Chow Ratio is a selection methodology that can provide the portfolio with minimal risk low volatility.”
The strategy is designed to enhance or compliment traditional indexed or multi-strategy portfolios as it is rebalanced weekly across 25 stocks drawn from the US large caps as included in the S&P 500.
Thompson says: “We are very excited in regards to how it’s performed over the first six months. Looking at the Morningstar universe we are a large cap value fund at number one over the first quarter and in the top 4 per cent over the first six months as well.”
Chow says: “Investors know that this is an innovative product offering a new approach for mitigating the ‘behavioural risk’ which is the downside risk caused by investor behavioural biases as well as maintaining the upside potential of gains”