Compass Efficient Model Portfolio Funds, the Tennessee-based registered investment advisor and fund issuer, introduced its fourth Smart-Beta exchange-traded fund on the NASDAQ following the firm’s debut in the ETF segment last month.
The newly launched Compass EMP US Discovery 500 Enhanced Volatility Weighted Index ETF (CSF) seeks exposure in US small-cap stocks while giving protection against downside risks. CSF tracks the in-house developed CEMP US Small Cap 500 Long/Cash Volatility Weighted Index, which in turn is based on the CEMP US Small Cap 500 Volatility Weighted Index, a volatility-weighted benchmark of publicly-traded US stocks with market capitalizations below $3 billion.
The CEMP US Small Cap 500 Long/Cash Volatility Weighted Index, unlike the parent index, additionally includes an innovative mechanism which allows it to slash equity holdings by 75 percent through increased cash holdings during bear markets.
To qualify for the index, small-cap US domiciled stocks with consistent net positive earnings for four consecutive quarters are identified. The strategy involves weighting the stocks based on their daily standard deviation (volatility of returns) over the last 180 trading days compared to the aggregate mean. The fund moves out of equities if there is a 10 percent decline in its daily highest value (DHV), based on the month-end price of the parent index.
The trigger for getting back into equities is either a return to the previous daily high after recouping losses, or; to benefit from cheap valuations, increase investments progressively as prices slump further by 20 percent, 30 percent and 40 percent. The fund’s underlying index is reconstituted every September and March. Compass believes such a strategy could outperform both traditional and active ETF returns over the long-term.
The index is constituted of 497 stocks with an average market cap of $1.7 billion. The index’s P/E ratio is 19.9 and it has a dividend yield of 1.5 percent when fully invested.
Sector-wise, financial services (24.3 percent), industrials (19.4 percent), information technology (15.4 percent) and consumer discretionary (15.1 percent) get the maximum allocation, while telecom services, at the bottom of the heap, manage to corner only 0.8 percent.
As the US recovery gains traction, small-cap stocks are likely to outperform their bigger large-cap peers. Investors who wish to capitalize on this opportunity while curbing downside risks may find the fund suitable.
CSF has a net annual expense ratio of 0.68 percent.
Disclosure: No holdings
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