The Nottingham Company, a consultant for mutual funds and ETFs and an ETF administrator, has launched three actively managed ETFs that are conversions from open-end mutual fund strategies. The three funds, the AI Quality Growth ETF (AQGX ), the RH Tactical Outlook ETF (RHTX ), and the RH Tactical Rotation ETF (RHRX ), were listed on the NYSE and joined the Adaptive ETF funds umbrella. Two more conversions are set to be announced this week.
Nottingham brings mutual fund conversion experience to the table as the first fund administrator to have converted a strategy in May. Mutual fund conversion is a complex process that Nottingham partnered extensively with the SEC on while converting its first fund, and it continues to work with the regulatory agency for each one to ensure that they are done accurately and are in compliance.
“We believe there will be a significant number of open-end mutual funds that will want to convert to ETFs in the next few years, and we are very pleased to be the first, and we believe only, fund administrator and private label issuer with success in this process,” said Kip Meadows, founder and CEO of Nottingham, in the press release.
AQGX seeks to provide capital appreciation by investing mainly in domestic stocks across any market cap with growth potential that is higher than average. The advisor uses quantitative analysis that looks at metrics such as variability, return on equity, debt to equity ratio, revenue growth, and above average growth in earnings. The top 30–40 securities that offer the highest growth rate potential are selected from this pool, creating a portfolio that is diversified across sectors and industries that are currently favorable.
The fund also utilizes a risk management strategy in which assets can be allocated into cash and cash equivalents, and that also uses a hedge overlay for downside protection that invests in inverse ETFs. When the hedge overlay is not in use, the fund allocates 10% of its position to a broad market equity ETF that can be reallocated for risk management purposes. AQGX carries an expense ratio of 0.97%.
RHTX seeks capital appreciation along with current income while providing downside protection by investing in equity ETFs and fixed income ETFs. Equity securities can be from any market cap and sector, and the fixed income securities are mostly investment-grade short- to medium-term durations. The fund can be split between the two investment types in any percentage according to the advisor’s analysis of internal technical research as well as economic fundamental research that includes market and economy conditions.
The fund can also invest up to 20% of assets into ETFs that are Real Estate Investment Trusts (REITs), limited partnerships, long/short equities, commodities, smart beta, and global macro strategies that are used to hedge the fund. Any portfolio funds that RHTX invests in will have similar strategies to its own or carry approved securities according to the investment objective of the fund. RHTX carries an expense ratio of 1.37%.
RHRX seeks capital appreciation by investing in ETFs using a sector rotation strategy and will invest in common stock, preferred stock, and convertible preferred stock across any market cap. The advisor utilizes an investment model that considers volatility, price momentum, and other indicators when comparing to indexes to determine current market trends. In negative markets, the fund can hedge by investing in ETFs that carry treasury bonds, ETNs, and leveraged and inverse ETFs.
The advisor invests into three segments: core, opportunistic, and dynamic, with each segment pulling from different investment universes. The fund is rebalanced every five weeks according to market indicators of strength and momentum. If too few sectors are currently invested in because of the current market environment, sector weighting can allocate largely to cash. In negative markets, the fund can carry significant amounts of cash or inverse ETFs. RHRX carries an expense ratio of 1.44%.
“We are excited and proud to continue as trend setters in the mutual fund and ETF markets,” said Adaptive Investments CEO Greg Rutherford in the press release. “Our primary clients are wealth management firms, and their clients like the convenience and tax efficiency of ETFs. Our first launch in May has proven quite successful, and we look forward to a similar path for these five net ETF conversions.”
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