Credit-on/Credit-off
Toroso Asset Management, the New York ETF research specialist, is listing an actively managed bond ETF of ETFs with a highly unusual investment strategy. The ATAC Credit Rotation ETF (JOJO) will rotate between junk bond ETFs and ultra-long duration bond ETFs (20+ years) based on how well the US utilities sector is doing. Specifically, the prospectus says, JOJO go off whether State Street’s XLU, its utilities sector ETF, is beating SPY.
When XLU beats SPY, JOJO takes this as a bearish signal and goes into credit-off mode. It then buys long duration bond ETFs and ditches junk bonds. This works in reverse when SPY beats XLU.
JOJO will do this because “The Adviser believes that… movements in the Utilities sector tend to signify repositioning in the market in advance of major credit spread widening environments,” the prospectus says.
The fund will charge 1.44%, however a waiver lowers it for the first 18 months.
Analysis – what is the benchmark?
There are several things about this fund that have me raising an eyebrow. The fee is too high, for one. The investment strategy will derive no alpha, for two. If the performance of the utilities sector were a signal on credit spreads rather than just historical noise (there is no logical reason that it should be) it will be arbitraged out by funds more sophisticated than ETFs.
But the thing that gets me the most is there is no clearly defined benchmark.
The prospectus just that JOJO is trying to achieve capital appreciation—okay. But a fund with a strategy like this needs to state more precisely what it is going to achieve for its investors above and beyond what vanilla ETFs can do.
Is JOJO trying to beat a benchmark tracked by garden variety ETFs? If so which one? Or is it instead trying to manage risk in a better way than Vanguard’s funds? If so, how is that risk measured and, again, how is JOJO benchmarked?
Absent benchmarking, it is hard to know how to use this in a portfolio. And hard to see how you can justify this type of fee.