Amid a cheerful day on Wall Street following the latest encouraging European Central Bank decision to move forward with a bond-buying program, RBS rolled out an innovative ETN that takes its suite of Trendpilot products to the next level. The new RBS US Large Cap Alternator ETN (ALTL) takes a creative approach in delivering dynamic exposure to a core asset class based on a rules-based quantitative methodology. The debut of this tactical tool marks yet another stride forward in the democratization of the investment process, while also pushing the ETP product lineup closer and closer to the 1,500 mark [see also How To Pick The Right ETF Every Time].
The new offering from the Royal Bank of Scotland joins the Trendpilot family, which is known for its risk-on/risk-off strategy. Trendpilot ETNs simplify the investment process by taking “timing” out of the equation as they track either an equity index of some sort or are entirely allocated to cash depending on historical moving averages. ALTL separates itself from the pack by being able to shift between all three asset classes as opposed to just two [see also Why Bill Gross Thinks The Fed Is Ruining The Economy].
So how does it work? ALTL employs a creative methodology that take into account prevailing market conditions as well as historical moving averages similar to the other Trendpilot ETNs. Based on a relative strength score, ALTL determines which of the following indexes to track: the S&p 500 Total Return Index, the S&P 500 Low Volatility Total Return Index or the S&P 500 Equal Weight Total Return Index.
First, a relative strength score is calculated for each of the above mentioned indexes; this is done by taking the simple moving average of the one-month, three-month, six-month, nine-month, and 12-month returns of each of the underlying benchmarks. It should be noted that the relative strength score is calculated with respect to the last business day of each month. Next, each month ALTL tracks the index with the highest relative score at the end of the prior month. This strategy allows investors to maximize returns in each part of the market cycle as exposure shifts among the various benchmarks accordingly [see also Cheapskate Hedge Fund ETFdb Portfolio].
In ALTL’s Fact Sheet, RBS cites various environments where each of the three indexes can be expected to outperform the other two. For example, during choppy markets, the Low Volatility benchmark is expected to offer better risk-adjusted returns than the other indexes, although it should also underperform in rising markets. Likewise, the Equal Weight benchmark has historically outperformed the S&P 500 at the beginning and middle stages of bull markets; however, the cap-weighted counterpart has proven to deliver the most attractive returns in the last stages of a bull market [see also ETFs For "Hand Off" Investing].
Investors should take note that ALTL is an ETN, and, as such, is subject to the underlying credit risk of the issuer. This offering charges a fairly steep 1% expense ratio, although this price tag is certainly worth it for those who find its “hands-off” strategy appealing.
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Disclosure: No positions at time of writing.