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An ETF To Help With Market Timing Issues

February 4, 2016 1:53 pm
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One of the most frequently committed errors by investors, professional and retail alike, is attempting to time the market. Market timing is tempting, but so are gummy bears and cigarettes, but that does not make either of those items good for one's health.

The WisdomTree Dynamic Long/Short U.S. Equity Fund (BATS: DYLS), which debuted in late December, can help investors ease the burden of market timing.

Timing The Market With DYLS

The WisdomTree Dynamic Long/Short U.S. Equity Fund, as its name implies, features both long and short equity positions. That new ETF's long positions are comprised of 100 large- and mid-cap companies that meet certain growth and value criteria. DYLS weights those according to their volatility traits. The new ETF's short equity positions “include the largest 500 U.S. companies, weighted by market capitalization, designed to act as a market risk hedge,” according to WisdomTree.

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DYLS holds large- and mid-caps, weighting its approximately 100 holdings according to the volatility traits possessed by those stocks. Part of a proper market timing strategy can include emphasizing factors, such as quality and value.

“These include trends in operating and net income margins, as well as profit quality. Profits are a key driver of the market, so when the bottoms-up profits of a broad cross section of the U.S. markets are deteriorating, the indicator would look to be more bearish and hedge the portfolio,” said WisdomTree in a recent note.

Technology and consumer discretionary stocks combine for over 34 percent of the long exposure in DYLS, while healthcare and financial services combine for over 29 percent of the ETF's weight. As corporate earnings and fundamentals erode, DYLS can implement a hedge by trimming its long exposure and increasing short positions.

“For DYLS to go from market neutral to unhedged, we would have to see changes in the growth or value score, which can happen if profit margins stop deteriorating (or improve) and/or prices fall more rapidly than fundamentals, which would improve valuation readings. Remember, although prices change rapidly, equities report earnings only quarterly. As the latest quarterly earnings data starts getting evaluated, the dynamic hedging indicator will reassess conditions monthly,” said WisdomTree.

WisdomTree's short equity index can pull from a universe comprised of the 500 largest U.S. companies.

Image Credit: Public Domain

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