Market Overview

A New ETF Aims To Buy The Dip

A New ETF Aims To Buy The Dip

A common refrain during the course of the current bull market in domestic equities is “buy the dip" — and a new exchange traded fund aims to do just that.

The Vesper U.S. Large Cap Short-Term Reversal Strategy ETF (NYSE: UTRN) debuted last Friday.

What Happened

UTRN targets the Vesper U.S. Large Cap Short-Term Reversal Index, an equal-weight collection of 25 S&P 500 stocks that have the potential to benefit from short-term reversals. In UTRN's case, the underlying index determines short-term reversals using an algorithm known as the Chow Ratio.

The Chow ratio is used “to identify stocks that have the greatest potential for a weekly rebound,” according to a statement from Vesper Capital Management.

The ratio is named for Vesper's senior investment consultant, Dr. Victor Chow.

Why It's Important

While UTRN is an index-based ETF, it is likely to have a high turnover ratio, a trait not usually associated with passive investments, as its underlying index is evaluated and rebalanced on a weekly basis.

“A stock in the index is only removed at rebalance if it has been assigned a numerical value that has risen out of the bottom 50 stocks of the S&P 500 and replaced with the stock with the next lowest value,” according to Vesper.

Short-term reversal trading is often used with small-cap stocks, but research suggests some of the success of that trade erodes due to high turnover and costs associated with applying the strategy to smaller companies. Short-term reversals work well even when confined to large-cap stocks.

“Additional research has shown that there is the potential for strong investment returns are still available even if the investment universe is limited to large-cap stocks and strategies are put in place to limit turnover,” according to Vesper research.

What's Next

The new ETF charges 0.75 percent per year, or $75 on a $10,000 investment. That is high relative to more traditional passive ETFs, but expected when considering the higher turnover associated with UTRN's strategy.

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