The Euclidean Fundamental Value ETF (NYSE Arca: ECML) has begun trading on the New York Stock Exchange. The actively managed fund invests in U.S. stocks across all sectors, excluding financials, that Euclidean Technologies believes are undervalued.
Using research machine learning applications, Euclidean Technologies has developed a set of models that estimates the intrinsic value of companies. The models will also simultaneously identify inexpensive stocks that are likely to underperform. ECML uses these models to systematically construct and manage a portfolio of high-quality value stocks.
ECML will generally hold 60 to 70 stocks.
Euclidean Technologies has developed a multi-step process to select investments from a universe of all publicly traded stocks on the NYSE and Nasdaq. First, all non-U.S.-based companies, financial sector companies, and companies with a market capitalization of less than $1 billion get excluded. Then, the firm’s machine learning-based model generates a discounted forecast of next year’s earnings for each prospective holding.
These securities are then ranked by how inexpensive they are relative to the model’s discounted forecast earnings. Next, the model identifies and screens out potential “value traps.” These are companies considered inexpensive based on current valuation multiples, but likely to have bottom decile price performance over the following year.
Euclidean Technologies then performs a final review to make sure the model isn’t receiving erroneous data or missing crucial information. This can include an announced bankruptcy filing, company officers being indicted, or the loss of a substantial client.
The stocks in the fund are continually monitored, with its portfolio being systematically rebalanced quarterly. ECML carries an expense ratio of 95 basis points.
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