Global X – best known for its wide array of commodity and country ETFs – recently introduced a product in the U.S. market focusing on a sector rotation strategy. The new product Global X | JPMorgan US Sector Rotator Index ETF (SCTO - Free Report) hit the market on October 21 and is detailed below.
SCTO in Focus
The newly launched fund seeks to provide exposure to five underlying U.S. sector ETFs that have demonstrated the highest positive performance during the previous month. The funds will be selected from a pool of 10 sectors and will be rebalanced on a monthly basis. In case there are less than five sectors that have demonstrated growth numbers, the fund will allocate the remainder to iShares 1-3 Year Treasury Bond ETF (SHY - Free Report) .
With this approach the fund will track the JPMorgan U.S. Sector Rotator TR Series X Index and will combine two investment strategies in one ETF. During market uptrends, the fund will use the sector rotation strategy to provide exposure to U.S. ETFs from sectors with strong momentum. However, during volatile or falling market situations, the fund will use a more defensive strategy and fix its assets to the safe haven U.S. treasury ETF.
Presently, SPDR Dow Jones REIT ETF (RWR - Free Report) and Consumer Staples Select Sector SPDR ETF (XLP) occupy the top two spots, each with a little over 25% allocation, followed by Utilities Select Sector SPDR Fund (XLU - Free Report) with 21% exposure. Health Care Select Sector SPDR Fund (XLV - Free Report) and Industrial Select Sector SPDR Fund (XLI) also have double-digit allocation in the fund.
The fund is pretty expensive with 86 basis points as fees (read: 3 Excellent ETFs for a Low Cost Diversified Portfolio).
How Does it Fit in a Portfolio?
The fund is a good option for investors willing to play the best performing sectors of the U.S. economy. The momentum play ETF provides an opportunity to capture the returns of the best U.S. sectors during bull markets. Moreover, the fund does a good job by opting to invest in the U.S. Treasury bond ETF during volatile or declining markets (read: PowerShares Plans Equal-Weight ETF Amid Volatile Market).
U.S. sector rotation funds did not have a successful run in the past. Among others, Sector Rotation ETF (XRO) is one of the funds that failed to gather significant assets and had to be shut down.
U.S. Equity Rotation Strategy ETF ((HUSE - Free Report) ) is, however, an ongoing fund launched in 2012. This actively managed fund doesn’t track any particular index and seeks to invest in 10 U.S. sectors included in the S&P Composite 1500 (see Total Market (U.S.) ETFs here).
Presently, health care, technology and industrials are the top three sectors in the fund. As far as individual holdings are concerned, Apple takes the top spot, followed by Exxon Mobil and Google. HUSE is quite unpopular with an asset base of $10.4 million and sees light trading volumes. The fund charges 95 basis points as expenses and has returned 9.9% this year.
Thus, the success of the newly launched product is a huge factor of its ability to garner sizable assets. If the funds do succeed in doing so, they might have great times ahead or else they are destined for closures like others in their space.
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