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Chow Ratio helps UTRN outperform the S&P 500


Vesper’s UTRN ETF, based on the Chow Ratio, developed by West Virginia University Professor Dr Victor Chow, has outperformed the S&P 500 Total Return Index over the last quarter, year to date and past year.

The fund turned one on September 21st and hit a trailing one-year return September 30th of 7.53 per cent compared with the S&P TR’s return of 4.25 per cent.

The ETF comprises 25 long only S&P 500 stocks, rebalanced on a weekly basis, and is designed to capitalise on individual stock short-term price reversal opportunities and asymmetric volatility.  The ETF’s aim is to protect on the downside, participate on the upside and outperform the S&P 500 with less volatility over the market cycles.

In addition to the net outperformance, the fund incurred only 60 per cent of the daily volatility of the S&P 500TR Index over that first year.

Chow says: “I had confidence in the design of the Chow Ratio because the way it trades is very consistent and very stable.”

John Thompson, Vesper’s president, says: “We outperformed but the bigger story here is that we did so, while incurring less volatility than the S&P.”

Potential investors who have been waiting to see UTRN’s performance over the first year have seen effectively a whole market cycle.  This includes factoring in the S&P 500’s negative 13 per cent return in Q4 last year.

“To come back and perform as strongly as we have this year with less volatility is a great story,” Thompson says.

“When I designed this algorithm it was not just an arbitrary thing, based on naïve thinking,” Chow says. “The algorithm was based on thousands of different kinds of scenarios. The market is dynamic so first and most importantly one must not speculate the market as our thinking and reaction times are slower than market rumours. The Chow Ratio was designed to create the optimal position to balance all types of dynamics.”

The ratio is designed with two parameters, performance and volatility.

Thompson says: “The two components are the numerator, where we look for stocks that have declined in value and the denominator which zeros in on stocks with low volatility. This combination allows the strategy to capitalise on the short-term reversal effect, and dampens the effects of unforeseen asymmetric volatility. at the same time.”

The ETF has raised USD32 million in the first year from independent and regional firms of financial advisors. In addition, it is beginning to attract the attention of some institutions, including public and union pension funds.

“A lot of these investors have had a rough time adding any value to the S&P 500 over the last 10 years and have employed many different types of fundamental, bottom up, growth and value driven managers. The reasons why it has been so difficult are because the S&P 500 is cap weighted and because 80 per cent of large cap trading is not fundamental any more. It is more high frequency and program driven. Therefore, an algorithmic, more behavioural-based strategy like ours has more of a propensity to add value. We have added over 300 basis points of outperformance over the last year”.

Thompson believes UTRN’s offering is somewhat unique. “We offer a different approach.  Platforms are starting to look at us as another type of low vol, smart beta or price reversal factor option.”

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