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Standard & Poor's


10/23/14 05:09:30 PM


Tactical ETF asset managers employ various tools to make regular changes to their strategies. Some focus on quantitative factors or technical analysis, others macroeconomic factors and still others employ a more fundamental approach. However Horizon Investments combines these three disciplines in managing their AAA Focus ETF Strategy.

Horizon's President, & CEO Robbie Cannon explained to S&P Capital IQ in early October that the strategy employs a thematic approach to making ETF selections. Currently, the belief that Central Banks around the globe are focused on injecting liquidity to the system has resonated in various allocations. For example, Horizon's lone Asian holding is in the WisdomTree Japan Hedged Equity ETF (DXJ 48 Overweight), which offers a hedge against the devaluation of the yen. DXJ has a 0.48% expense ratio and holds dividend-paying securities that derive the vast majority of their revenues from outside of Japan. From a sector perspective, consumer discretionary and industrials stocks are well represented compared to other Japanese ETFs.

For European exposure, management uses iShares MSCI Europe Financials (EUFN 23 MarketOverweight) to benefit from the "free money" being supported by European Central Bank activities. While focused on just one sector, the ETF is relatively diversified across European markets, with 75% of assets spread across banks and insurance companies in the United Kingdom, Spain, France, Switzerland and Germany.

Within the U.S., the strategy also has a position in SPDR S&P Bank (KBE 31 Marketweight), an equally weighted ETF, that primarily consists of regional banks such as Associated Banc-Corp (ASBC 17 ***) and Huntington Bancshares (HBAN 10*****). The ETF has a 0.35% expense ratio and trades with a tight $0.01 bid/ask spread.

Another theme is focused on innovation and how companies using technology can benefit more from an improving U.S. economy. One such holding is PowerShares QQQ Trust (QQQ 95 Overweight). While 56% of the ETFs assets are in the information technology sector, an additional 11% of the ETFs assets are in the biotechnology industry. Holdings include Intel (INTC 32 ****) and Gilead Sciences (GILD 104 *****). However, Cannon noted that in an effort to manage risk, exposure toward this theme is also achieved through a stake in iShares S&P 500 Growth (IVW 103 Overweight). Information technology (26% of assets) and biotechnology stocks (5.5%) were well represented, but consumer discretionary (16%) and industrials (11%) stocks provided greater diversification for the strategy.

The thematic allocations can be held for as little as a month as well as six to nine months, depending upon the quantitative, macroeconomic, fundamental views of management. However, these tactical positions are surrounded by both SPDR S&P 500 (SPY 192 Overweight) and iShares S&P 500 Index (IVV 191 Overweight) that provide exposure to the same index. Cannon explained that while the allocation to SPY has been more static, Horizon will trade in and out of IVV on a more regular basis.

In ranking more than 700 equity ETFs, S&P Capital IQ combines holdings-based research with analysis on the costs and trading patterns of the ETF. An ETF ranked Overweight stands out for a variety of factors. To learn more about our views on the Horizon allocations, see the S&P Capital IQ report on this platform. To better understand the approach and the resources behind the strategy, visit


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