Market Overview

A Better Way To Beat Beta

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A Better Way To Beat Beta

The Salt Low truBeta US Market Fund (CBOE: LSLT) may be known as the exchange traded fund that debuted earlier this year promising to refund investors (sort of) for assets allocated to the fund.

As was reported in this space in March, “New York-based Salt's newest ETF will refund investors 50 cents for $1,000 invested in the fund until LSLT reaches $100 million in assets under management. That fee waiver is in effect until April 2020; then a traditional management fee of 0.29 percent per year, or $29 on a $10,000 investment, kicks in.”

What To Know

While the Salt Low truBeta US Market Fund's fee scheme is unique, there are more potential benefits with this fund beyond the possibility of fee rebates. LSLT could eventually prove to be a superior avenue for accessing one of investors' favorite factors: low volatility.

“truBeta uses intraday returns at the heart of its forecast technique but is calibrated to a one-quarter horizon,” according to research conducted by Salt Financial. “The measure is designed for use in portfolio construction to target a specific market risk profile while limiting turnover. This trades off some accuracy in the very short term for more stability over intermediate term for situations where constant portfolio adjustments are either impractical or too costly.”

LSLT tracks the Salt Low truBeta US Market Index. That index includes domestic large- and mid-cap stocks with reduced sensitivity to the SPDR S&P 500 ETF (NYSE: SPY) and lower historical betas.

Why It's Important

LSLT's underlying index starts with the 1,000 largest U.S. stocks, keeping only the 500 most liquid names. From there, the stocks with truBeta estimates of 1.0 or higher are eliminated. The top 100 stocks are ranked by beta variability with sector weights being capped at 30 percent.

The index allocates 51.4 percent of its combined weight to the consumer staples and financial services sectors. Utilities and health care names combine for 26.4 percent.

“We developed truBeta as a building block for portfolio construction to better capture the impact of market sensitivity as a measure of risk and gauge of expected return,” according to Salt.

Past performance is never a guarantee of future returns and the sample set is undoubtedly small with LSLT, but since the fund debuted, it has outpaced the largest U.S. low volatility ETF by about 80 basis points.

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