Everyone knows market timing doesn’t work, and at worst is downright dangerous, right? Or is it?

Hull Tactical Asset Allocation LLC take the counter argument that the proliferation of market data, combined with predictive analytics and growing academic literature supporting the notion that returns are predictable, makes market timing a viable proposition. And it’s the basis for the Hull Tactical US ETF (HTUS), an actively managed exchange-traded fund that unabashedly practices market timing in pursuit of its simple yet audacious goal of beating the S&P 500 with lower volatility.

Blair Hull, founder of Hull Tactical Asset Allocation in Chicago, posits that one reason for the stigma surrounding market timing has been people’s inability to be objective and systematic about their investment approach. “Unless you have a systematic approach you apply every day, you’re sort of destined for failure,” he says.

The HTUS fund is based on a proprietary and patent-pending quantitative trading model that invests in just two assets classes: equities and cash instruments.

The former consists of long and short positions in S&P 500-tracking ETFs, and can employ futures, as well as leveraged or inverse ETFs, based on the S&P 500. Cash instruments comprise cash or cash equivalents such as three-month U.S. Treasury bills.

The fund’s benchmark is a 60/40 mix of the S&P 500 and Citigroup 3-Month Treasury Bill indexes. For now, though, that benchmark isn’t even close to the fund’s current allocation of 90 percent in cash and 10 percent in the SPDR S&P 500 ETF Trust (SPY). Hull says this allocation has been in place for about six weeks. “We’ve outperformed during this period,” he notes.

Based on net asset values during the period from its inception on June 24, 2015 through September 23, the fund was down 1.72 percent versus a 7.99 percent drop in the SPY fund and a 4.80 percent loss in its 60/40 combined benchmark.

On a daily basis, the HTUS fund’s quant model evaluates current metrics and 12 years of historical market data in an attempt to predict the performance of the S&P 500 Index during the upcoming six months.

As noted in the prospectus, the fund’s investment strategies may result in relatively high portfolio turnover and higher transaction costs that could lower fund performance.

“An actively managed ETF certainly will have more capital gains distributions than an index fund,” says Steve McCarten, chief operating officer of Hull Tactical Asset Allocation. “We hope the ETF wrapper can help reduce that through the ETF creation and redemption process.

“This is a long-term investment product,” he adds. “We hope to beat the market over the long term, and we feel this product should be in a long-term retirement account with tax-deferred benefits.”

In that vein, Blair Hull says the fund’s tight focus on the type of assets it trades is an attempt to keep a lid on expenses. “One of the issues of market timing is the transaction costs of getting in and out,” he says. “By doing SPDRs alone and doing them at the close and in the auction, our costs are small. One of the keys to this strategy is using just the S&P 500.”

The fund’s gross annual operating expenses are 100 basis points—a management fee of 91 basis points plus acquired fund expenses of 9 percent. The latter pertains to HTUS’ fund-of-funds structure that incorporates management fees charged by the underlying funds it may ultimately use. The 9 percent figure is a first-year estimate based on the SPY ETF’s fee, which due to its liquidity will be a prime equity trading vehicle for the HTUS fund. After the first year, the fund will list the prior year’s actual fees.

The ETF has garnered about $13.5 million in assets. Fund management considers this to be an alternative investment that should be allocated to the alts sleeve of an investor’s portfolio.

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