Factor investing is all the rage in the exchange-traded fund world, especially multi-factor funds that combine the value and momentum factors.
A new entrant into this crowded space is the Alpha Architect Value Momentum Trend ETF (VMOT), which seeks to stand out with a fund-of-funds ETF combining domestic and international value and momentum ETFs with a hedging twist.
VMOT combines Alpha Architect’s four other ETFs—the MomentumShares U.S. Quantitative Momentum ETF (QMOM), MomentumShares International Quantitative Momentum ETF (IMOM), ValueShares U.S. Quantitative Value ETF (QVAL) and ValueShares International Quantitative Value ETF (IVAL)—and overlays it with a trend-following system.
VMOT, which launched last week, has $17.50 million in assets under management and an expense ratio of 79 basis points.
The VMOT product uses a risk-parity weighting between the four funds to manage risk exposure, says Wesley Gray, chief executive officer and chief investment officer of Alpha Architect. The trend-following piece of VMOT is to manage the beta bet, something that’s inherently imbedded in the combined ETFs, he adds.
The fund follows two metrics on a monthly basis to determine whether or not to hedge. For the domestic ETFs, it looks at the 12-month moving average of the Standard & Poor’s 500 Index and the 12-month return on the S&P relative to the 12-month return on T-bills. If both are positive, the ETF stays unhedged. However, if both metrics are violated, the fund will go into a 100 percent hedge, what Gray calls a market-neutral stance by shorting the SPDR S&P 500 ETF (SPY) or the S&P futures contract. If one metric is violated, the fund will put on a 50 percent hedge.
On the international side, the same metrics apply, except that the benchmark is the MSCI EAFE Index.
Even though all of these funds are index-based, using this trend following twist makes VMOT a little more active than a straight passive fund.
VMOT is for investors who want both value and momentum exposure for diversification, but don’t want to have to decide how to balance the two themselves, Gray says.
Broomall, Pa.-based Alpha Architect launched its first ETFs in late 2014, and in that short time they’ve mostly performed well in both a year-to-date and one-year performance standpoint. The outstanding fund is IVAL, which is up 15.56% year-to-date, and is up 30.86% on a one-year basis. It has $51.35 million in AUM. This fund—like all of Alpha Architect ETFs—has a net expense ratio of 79 basis points.