Investment Universe

AlphaSector Rotation Index uses disciplined buy and sell signals to construct an index based on the major sectors of the S&P 500 investment universe.  All AlphaSector indexes invest through exchange-traded funds (ETFs), which provide ease of access, liquidity, transparency and low transaction costs. The AlphaSector Rotation Index uses ETFs tracking the US Equity Sectors.

In addition to Sector ETFs, the index portfolio includes a Short-Term Treasury ETF, which serves as a cash equivalent.  The Index has the potential to be invested in any combination of the nine US equity sectors including all nine at the same time, a combination of sectors and the Treasury ETF, or can be 100% invested in the Treasury ETF.

Disciplined Quantitative model

A sophisticated, quantitative algorithm drives the construction of the AlphaSector Rotation model portfolio.  The investment characteristics and performance of the model portfolio are tracked in AlphaSector Rotation Index.

Index portfolio construction process:

• When fully invested, the index holds all nine of the U.S. Equity sectors:  At the point of rebalancing in a fully-activated mode, the index is equally weighted in each sector at 11.1%.
• The critical process, executed on a monthly cycle in the AlphaSector Rotation Index, is the model’s review of each of the nine sectors to be either included or excluded from the portfolio based on likelihood of forward-looking positive return.
• The decisions are generated through a sophisticated analytical engine that evaluates “true” sector trends while adjusting for market noise and for changing levels of volatility in the market.
• The key model inputs (driving the decision-making process of the algorithm) are data on total return movements, volatility, and rate of change in volatility for the subject ETF.
• The model output is a binary decision.  If a sector receives a positive signal for investing, it is included in the index portfolio.  If a sector receives a neutral or negative signal, it is removed.  All sectors represented are equally weighted, with a maximum allocation capped at 25% of the Index at the time of rebalancing.
• If there are three or fewer sectors represented at a given time, the remainder of the portfolio (reflecting the 25% maximum cap per sector) is invested in the Short-Term Treasury ETF, representing cash.  The Index can be 100% invested in the cash equivalent if all sectors receive a neutral or negative signal for investing.
• The presence of a BIL position in the index portfolio during bear markets is a clear illustration of the F-Squared’s philosophy of “client-centric not benchmark-centric.”  Conventional U.S. Equity investment strategies would continue to track to the S&P 500 during a bear market, seeking to achieve only relative outperformance.  Investors are subject to potentially severe drawdowns, even while their traditional manager is perceived as “beating peers.” In contrast, the AlphaSector model breaks the correlation to the S&P by deploying the cash equivalent.  Delivering downside risk controls is our approach to meeting client needs.

Model assessment frequency

• The AlphaSector Rotation model is run on a monthly basis.  However, the index portfolio is not changed or rebalanced unless the model indicates the need.  In periods of stable markets, such as during a long-term positive trend, the index portfolio allocation may not change for an extended period.
• The ability to reposition the portfolio rapidly, particularly in volatile and downward markets, is a critical attribute of the strategy.  It is theoretically possible for the model to indicate a move from a fully-invested position (100% equity, invested in from four-to-nine equity sectors) to 100% cash equivalent in a single cycle.  Other periods may see no change in the portfolio, or a relatively minor change (from nine sectors “turned on” to eight “turned on.”)

Index performance information and additional materials