ETF providers are offering
more and more actively managed funds -- the biggest trend in the
Josh Emanuel serves as chief investment officer at Irvine,
Calif.-based the Elements Financial Group, with $450 million in
assets. He managesAdvisorShares EquityPro ETF (
) andAdvisorShares YieldPro ETF (
EPRO launched in July 2012 and YPRO debuted on
the stock market
on March 7. EPRO has nearly $16 million in assets under
management. Categorized as a moderate-risk fund, it returned 19%
last year and 1% year to date vs. 32% and 0.9% for SPDR S&P
Emanuel explains the investing strategies behind these two
actively managed ETFs.
What are your investing strategies? How do you go about picking
In YPRO, our portfolio construction process begins with an
assessment of broad market conditions such as equity market
valuations, economic conditions, financial stress, fund flows,
technical analysis, and the yield difference between high-yield
bonds and U.S. Treasury bonds, which serves as a good indication
of market risk.
Given our assessment of broad market conditions, we then seek
to determine how best to allocate our assets among investments
that offer the most compelling yield relative to risk. We then
seek to reduce equity risk and/or interest rate risk as needed by
investing in put options.
The first investment decision made in EPRO is the percentage
of assets to allocate to global equity markets. We use two
indicators to determine this: The 200-day moving average of the
S&P 500 Index and the slope of the U.S. Treasury yield
The 200-day moving average is the average price level of an
investment for the past 200 days, and the yield curve is a chart
that plots interest rates of U.S. Treasury bonds at different
If either the S&P 500 Index falls below its 200-day moving
average, or if shorter-term interest rates are higher than
longer-term interest rates on the U.S. Treasury yield curve, we
will lower the equity allocation.
The fund is constructed to diversify risk across sectors,
which results in significant differences in our sector allocation
relative to the S&P 500 because indexes tend to concentrate
most of their risk in a few sectors. We then make active
overweights and underweights based on the 200-day moving averages
of each underlying sector.
What are your buy, sell rules?
The buy and sell rules for YPRO are EPRO are very disciplined. In
YPRO, we buy investments that provide competitive yield given the
risk of the underlying investment. If the yield is no longer
sufficient to compensate us for the risk that we are accepting,
we will sell the security.
In EPRO, we seek to have exposure to all 10 global sectors.
However, our decision to increase or decrease our weightings will
be based on how the sector is trading relative to its 200-day
moving average. For example, if a sector is trading below its
200-day moving average, we will typically trim our allocation to
Why is YPRO currently invested in preferred, high-yield and
intermediate-term corporate bonds? And why is EPRO invested in
global consumer staples, health care and basic materials? What
catalysts will make them outperform other sectors?
The top three positions in YPRO arePowerShares Preferred (
) at 15% of assets,AdvisorShares Peritus High Yield (
) 14% andVanguard Intermediate-Term Corporate Bond (VCIT)
PGX and HYLD represent two of the most attractive yield
opportunities, given the risk of these positions. We prefer HYLD
to indexed ETFs because we believe that the securities in the
index are overbought, and the indexes have historically provided
a lower yield with more risk.
Although VCIT does not provide as competitive of a yield
payout as the other two top positions, it plays a crucial role in
providing diversification in the portfolio, and we hedge the
interest-rate risk in VCIT by buying put option(s) on other, more
interest-rate-sensitive positions which are expected to gain in
value if interest rates rise. We also hedge some of the equity
risk in HYLD and PGX by investing in put option(s) on equity
ETFs, which are expected to rise if equity prices fall.
The top three positions in EPRO areiShares Global Consumer
Staples (KXI), weighted 14%,iShares Global Health Care (IXJ),
13%, andiShares Global Energy (IXC), 9%. They are exhibiting
lower risk and correlation to the rest of the portfolio, and also
look competitive on a technical basis.
Although EPRO is fully invested, our sector positioning is
more defensive in nature, which makes sense given valuations
What leads you to believe that your EPRO investment strategy can
beat SPDR S&P 500 over a market cycle, as well as how can
YPRO can beat its bond benchmark?
The investment process for EPRO is entirely quantitative and
rules-based, and our signals are based on considerable historical
analysis. Although past performance is not indicative of future
results, we continue to enhance our models to evolve to the
current environment. We believe that if we can capture most of
the upside in equity markets, and protect in extreme down
markets, we can outperform over a full market cycle.
YPRO is constructed to deliver a level of risk that is
relatively consistent with the Barclays Capital Aggregate Index
while delivering a considerably higher level of yield. On a
forward-looking basis, our secular outlook is for bond yields to
rise, which is likely to result in negative returns for fixed
income. Our ability to hedge interest-rate exposure, while
seeking alternative avenues to generate yield, provides us with a
significant competitive advantage relative to the index.
Are there extra tax consequences for investors?
There are greater tax consequences for investors in EPRO and YPRO
relative to a passive ETF, but not relative to active mutual
funds. Investors continue to benefit from the in-kind
creation/redemption process relative to mutual funds. Given the
income orientation of YPRO, investors should also recognize that
the fund will make monthly income distributions, which will be
taxable if the fund is held in a taxable account.