A new tactical rotation strategy ETF based on the behavior of lumber relative to gold began trading on the New York Stock Exchange on Wednesday.
The ATAC US Rotation ETF (NYSEArca: RORO) is the brainchild of Michael A. Gayed, CFA, Portfolio Manager of Toroso Investments, an investment management company specializing in ETF focused research, investment strategies, and services designed for financial advisors.
The ETF will track the ATAC Risk-On/Risk-Off Domestic Index (RORO.Index), designed to be a tactical US stock/Treasury rotation strategy based on the behavior of lumber relative to gold.
“We could not ask for a better ticker,” notes Gayed. “Historically, when lumber is outperforming gold, that tends to suggest we’re in a risk-on period of lower stock market volatility, on average.”
He continues, “When lumber is outperforming gold, the average volatility for the S&P is about 13.5%. When gold outperforms lumber, the average stock market volatility rises to about 19.4%, making for a pretty big difference.”
“The link is housing. As housing is such a key driver of U.S. consumer wealth, growth, and inflation expectations, lumber is the most leading indicator out there. Gold, on the other hand, is not really cyclical. It reacts to risk-off periods. So the idea is that these two areas say something about the risk for the broader equity markets.”
Making RORO Go Round
The ATAC US Rotation ETF is a tactical strategy designed to seek absolute returns across multiple market cycles. The Fund rotates offensively or defensively based on historically proven leading indicators of volatility, with the goal of taking less risk at the right time.
“When lumber outperforms gold, it will go into a combination of small caps and large growth,” he said. “When gold outperforms lumber, it rotates into treasuries. It looks at that on a weekly basis.”
Gayed continues, “I’ve always wanted to bring my approach to risk-on and risk-off trading to the exchange-traded marketplace. For investors looking to diversify with a US-focused tactical rules-based strategy in what may be a much more volatile cycle going forward, RORO may be a great way to take advantage of swings to come between U.S. stocks and Treasuries.”
He also discussed how RORO’s index was created.
“The way that the index was constructed is to feature lumber and gold as risk on, risk off signals, and a shorter, quicker timeframe than what’s in the paper, and make it very simple — rotate around these two.”
“The index is up about 21%, which is actually a very good year, in the context of the insanity, but it has gotten nowhere for 6 months. The bulk of this Index’s performance is coming out of Covid, and that’s when lumber prices started rising.”
Gayed continues with what he finds most interesting about the operation of RORO, “In a world of tremendous correlation, the correlation of the index is basically flat, which makes sense. It’s not in equities for the buy and hold tracking. It’s in them as plays for the risk on/risk off dynamic that lumbering won’t tell you about.”
In May of 2015, Gayed wrote an award-winning white paper titled “Lumber: Worth its Weight in Gold,” where he illustrated that strategies using the signaling power of Lumber and Gold result in stronger absolute and risk-adjusted returns than a passive buy-and-hold index.
Learn more about the fund here.
This article originally appeared on ETFTrends.com.