The second ETF from Tuttle combines trend-focused strategies with dividend-producing assets.
One of the most recent entrants to the ETF industry, Tuttle Tactical Management, has launched its second exchange-traded product that identifies short-term and intermediate-term market trends. After the debut of the U.S. Core ETF (TUTT) earlier this year, the Multi-Strategy Income ETF (TUTI) applies a similar trend-monitoring strategy to income-producing securities.
Trend Following 101
Trend following as an investment strategy involves an analysis not of fundamental factors such as revenue growth or earnings ratios but rather of technical indicators related to the price movements of securities. Trend-based investing strategies are nothing new; for decades, investors have been monitoring relative performance with the goal of identifying repeating patterns that indicate the upcoming performance for various securities. In addition to applications in managing stock portfolios, trend following is popular as the basis for managed futures strategies as well.
The basic concept is extremely simple: asset classes with strong recent relative performance are expected to continue their outperformance and vice versa. Some strategies attempt to identify points of a trend reversal when a recent leader turns to a laggard and begins to trail its peers. The challenge lies in the details; the definitions of uptrends, downtrends, relative strength, and reversals are subject to interpretation. Various models can define these characteristics in different ways, which leads to different buy/sell indicators and results. Further, there are a number of different indicators that can be used in an attempt to identify trends, including relative strength, moving averages, and numerous other “set-ups.”
In general, trend-following strategies (or “trend-aggregation” strategies as Tuttle prefers) will perform well when markets are trending consistently lower (as they did in 2008) or trending consistently higher (as they generally have during the subsequent recovery). Back-and-forth markets can present challenges because there is no defined trend that these strategies can “ride.”
TUTI in Focus
TUTI is based on the premise that markets move in trends and countertrends over both the short and intermediate-term. Asset classes exhibiting strength tend to deliver strong performances — and vice versa — over the intermediate term. At the same time, shorter-term price movements can be impacted by several factors (for example, media coverage).
While the first Tuttle ETF allocates to broad equity funds, TUTI focuses on observing trends — and making corresponding allocations — in asset classes typically associated with current income. These include dividend stocks, preferred stocks, convertible bonds, REITs, bonds, and covered call strategies.
Specifically, the TUTI managers will consider four models when allocating the portfolio’s assets:
- Income Relative Momentum Model: Based on a monthly evaluation of relative strength in income-producing asset classes.
- Dividend Countertrend Model: Invests in dividend stocks when daily market models trend downward and cash when trending upward.
- Dividend Tactical Fundamental Earnings Model: Invests in dividend stocks when weekly models indicate stock prices trending upward and earnings trending downward (and vice versa).
- Dividend Absolute Momentum Model: Based on an evaluation of intermediate-term relative strength, this model will generally invest in dividend stocks when markets trend up and cash or bonds when markets are trending down.
TUTI Portfolio
Because the four models listed above are generally uncorrelated, the TUTI managers could receive indications suggesting many different asset classes at any given time — and thus have a portfolio consisting of various strategies. As of June 10, the TUTI portfolio was approximately split between the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) and the SPDR Barclays Convertible Securities ETF (CWB).
EMB, which holds the debt of emerging markets issuers, had been trending upward for most of the year — it was up about 3.8 percent through May — but had struggled recently and lost 2.6 percent during the first eight trading days of June.
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An asset’s Relative Strength Index (RSI) can be used to evaluate whether an asset is “overbought” (an RSI above 70) or “oversold” (RSI below 30). If these readings return to equilibrium, overbought securities should be sold or avoided, while oversold assets may be poised for a short-term breakout. (An explanation of the RSI calculation is available here.) Although it had generally been trending higher over the past few months, EMB had an RSI indicator of just 26.1 as of June 10. That perhaps indicates that it had been oversold and was due to experience a rally — just as it did in March of this year.
Because multiple models used by TUTI monitor short-term trends, this fund’s holdings may change from week to week depending on the relative performance of the asset classes under consideration.
TUTI in a Portfolio
TUTI’s short-term focus and asset class flexibility — it may be a stock and real estate fund one week and a bond fund the next — makes it a unique product to evaluate for a portfolio. While it can certainly be used as a minor allocation designed to lower overall risk, it could potentially be given a larger allocation and used to achieve current income.
Like many trend-following securities, TUTI may be appealing to those concerned with preserving capital in the event of a correction. Because it has the flexibility to allocate cash and relatively safe asset classes, TUTI should outperform traditional dividend-focused and equity funds in the event of a prolonged decline in stock markets.
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