Connecticut-based Fairlead Strategies was the first ETF of ETFs winner in the ETF Express US awards, representing a new development in the fast-growing and fast developing industry.
Katie Stockton, CMT is Founder and Managing Partner of Fairlead Strategies, which is an independent research firm and investment adviser focused on technical analysis. The ETF fund of funds that she manages is the Fairlead Tactical Sector ETF (TACK).
TACK is a model-driven ETF aligned with Fairlead Strategies disciplined technical methodology with a discretionary overlay reserved for market anomalies. The basis of the model is technical analysis, with an emphasis on indicators designed to identify trends and major trend reversals.
Fairlead considers 14 ETFs – all State Street products – for inclusion in the strategy, all of which are actively traded with large AUMs and low fees, but typically holds five to eight ETFs at any given time.
The primary goal of TACK is to leverage sector leadership, while navigating equity market downdrafts through asset allocation.
Stockton considered herself a ‘math person’ and was inspired by the dynamic nature of markets while at college, studying at an undergraduate business school.
“When you are young, the biggest fear is to have a boring desk job, and there is nothing boring about the markets,” she says. She had early exposure to technical analysis of markets through internships, which meant that she graduated with level one of the CMT designation.
“What a gift that was, and it differentiated me and set me on a good path,” she says.
While most of her career has been spent on Wall Street providing technical analysis for institutions, she moved to entrepreneurship, with the launch of Fairlead Strategies in 2018.
“Universities have programmes focusing on entrepreneurship,” she notes, “but you get there by identifying a problem and trying to fix it or address it in some different way. The problem I identified was compression in the fees that were available on Wall Street as technology advanced. Trading got cheaper which created some risk in terms of the research model on Wall Street. There were also regulatory changes, and I felt there was a market for what I was doing on Main Street.”
The result was a firm that moved away from just institutional clients, commanded a lower fee but offered institutional quality research for advisers, hedge funds and asset managers.
The firm has been running for five years and launched TACK, which has assets of USD207 million, in March 2022. Growth has been organic and the plan is that this is the first foundation for more offerings.
“2022 was a difficult year for markets and we thought we could outperform in that environment, and it has been a great proof-point win for the strategy,” Stockton says.
The model behind TACK was developed with quantitative input from clients and consultants in the business, surrounding the firm’s rules-based methodology.
“We are trying to be long term in orientation, trying not to get caught up in the noise in the market,” Stockton says.
2022 tested the model and it proved itself, Stockton says, starting with a fairly risk on position which morphed into a risk-off stance.
“If the market is trending up, we choose the best from a quantitative perspective and in a less than wonderful market, we use our remaining buckets which are spread between alternative asset classes – short and long-term Treasuries and gold.”
That level of diversification has enabled the firm to build the protective downside part of their strategy. “It’s almost a barbell strategy,” she says. “We are rewarding the leading sectors of the market at the moment.”
Looking to 2024, Stockton hopes to see something more of a sustainable bull market cycle that will benefit the portfolio.
The TACK portfolio went into an ETF structure because it was, Stockton, says, ‘the best wrapper for our strategy’. “It’s really accessible and our adviser client base is open to ETFs and using them in a way that wasn’t the case five years ago.
“I love the accessibility and the fact that we are not fighting against that trend of fee compression,” she says. “We can offer these products with relatively low fees which is a great element of the strategy and with a nice tax wrapper around an active ETF that averages over 100 per cent turnover of its positions in a year.”
Next year sees the firm highly focused on the ETF and also the firm’s research business.
“Our primary focus is on those businesses and ideally we get to the place where our successes can afford new products, taking TACK’s model and applying it to different asset classes to see its value over shorter time frames,” she says.