New Fund Only Wants Stocks That Bring the Volatility: ETF Watch

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(Bloomberg) -- While some people want to hide from volatility in the stock market, others are saying, “Bring it on.”

The Salt truBeta High Exposure ETF, ticker SLT, launched Wednesday and tracks an index consisting of 100 equal-weighted stocks that have the “highest sensitivity” to market moves. Ideally, the exchange-traded fund seeks to mimic the effects of leverage, which magnifies stock market returns, without the use of derivatives or borrowing -- while charging $5 for every $1,000 invested.

“The idea was to arrive at a simple product that’s accessible, that doesn’t have some of the barriers and limitations of the leveraged products, and that could be easily understood,” said Alfred Eskandar, president and chief operating officer of New York-based Salt Financial. “That was the challenge we wanted to unravel -- how do you create a product that gives the benefits of leverage without the side effects?”

The strategy boils down to what Eskandar and Tony Barchetto, founder and chief investment officer of Salt, call “truBeta.” According to the duo, previous measures of “beta” -- the financial term for how closely a stock moves with the broader market -- use outdated information and aren’t accurate gauges of a stock’s volatility in real time. So they created truBeta, which takes into account intraday, daily, and monthly price metrics to estimate a company’s sensitivity to the market.

“Traditional estimates of market sensitivity using historical lower-frequency daily or monthly returns often fail to produce consistently accurate forecasts of near-term beta,” Barchetto wrote in a white paper released last month explaining the new measure.

The ETF will naturally focus on more volatile sectors, such as technology and finance, and it was built to work as an institutional portfolio construction tool, according to Eskandar and Barchetto. However, they expect much of its allure to come from its ability to mimic the effects of leverage without taking out a loan, a concept that’s resonated with retail investors, they say.

Still, beta cuts both ways. While investors may not have to interact with the embedded derivatives present in most other leveraged funds, they will need to remain wary if the market sours. And as Barchetto notes, the ETF isn’t going to beat the market all the time.

“We say we’re going to give you a product that moves with the market in what we believe is a predictable way,” he said. “So it will go down hard and come back even faster.”

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