Wednesday, March 18, 2015

VALX "New-to-Market"

New-to-Market - This blog series highlights ETFs that have recently gone public and reflect those strategies currently most in demand by investors.  While ETFs are not eligible for ETFG Risk Ratings until traded for 3 months and ETFG Reward Ratings for 12 months, our goal is to highlight the most cutting-edge investment strategies that have recently embraced the ETF structure – we hope you enjoy this special series of posts.

Regular readers of our “New-to-Market” series might remember the February 11th post that featured the TWM Deep Value ETF (DVP) and specifically how their rules-based portfolio construction approach was something that Benjamin Graham might recognize.  Well that got some of us at ETF Global excited about the possibilities of building ETPs that instead of copying the holdings from a 13F filing would instead replicate the styles of the investment greats like Graham and Buffet.  We discovered the recently launched Validea Market Legends ETF (VALX.) and how it aims to bring the timeless lessons of the investing greats to the public for a reasonable price.

Actively managed by Validea Capital, the fund is the result of backtesting 17 investment strategies built around the styles of different investment gurus although all are fundamental strategies focusing on price and value rather than any purely technical trading strategies.  Validea aims to reduce volatility and drawdowns by selecting ten of these models based on historical performance and correlation with the fund drawing from a universe of 2,500 stocks run through each of the models with the 100 highest scoring stocks making the cut.  Given the significant use of momentum and valuation in fundamental strategies, the fund has a 10% cap on individual positions and individual sectors (no more than 40%) to keep the portfolio from taking on too much non-systemic risk.  Every 28 days there is a rebalancing where 10% of the portfolio is traded and stocks whose scores have fallen below the initial threshold are swapped out for newer positions.

Those who are fixated on the style box or hugging a benchmark might have a difficult time with VALX as one of the consequences of their approach is that the portfolio includes growth and value names as well as a bias towards the small and mid-cap spectrum with nearly 50% of the portfolio in small/microcap stocks.  For Validea, the focus is on the best stock whatever the size although classified as a mid-cap blend thanks to an average market cap of $3.6 billion.  One of the largest positions at 1.39% is the hot data exchange operator and serial acquirer Ebix Inc, already up a spectacular 76.5% in 2015 and which shares nearly the same amount of portfolio space with more cyclical discount retailer Ross Stores.  For those worried about the volatility of small cap stocks, you can take comfort in more than just the cap of individual position sizes. The portfolio does have large and even giant cap stocks in the allocation which helps reduce overall volatility.  While the great run-up Ebix has enjoyed in 2015 pushed the stock above the $1 billion market cap level, it can’t hold a candle to giant-caps like Apple (.93% of the portfolio) or financial titan Blackrock (.91%.).

The performance in 2015 is in-line with what you would expect from an actively managed fund with a more small-cap focus; VALX has outperformed the S&P 500 with the market up .75% compared to VALX’s 2.9% YTD although the fund has lagged its lower cost competitors like the iShares Russell 2000 ETF (IWM) which is up 3.38% or iShares Russell Mid-Cap (IWR) up 3.54%.  Launched last December, the fund is still in its infancy but the unique portfolio construction process has already proved itself in a limited test.  Thanks to its concentrated portfolio, VALX managed to strongly outperform the market as well as IWM and IWR in February and after the equity markets flipped into “risk-off” mode at the start of the March, VALX has managed to break even compared to the S&P 500’s loss of 1.44% while mid-cap IWR has lost 0.32% and IWM has seem a .88% gain.  For those investors looking to lean on the wisdom of the greats and not afraid to color outside the lines, VALX might be a fund to put on your watch list.

Thank you for reading ETF Global Perspectives!

*Please note that ETFs are eligible for ETFG Red Diamond Risk Ratings following 3 months of trading and ETFG Green Diamond Reward Ratings following 12 months of trading.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

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