The Vesper U.S. Large Cap Short-Term Reversal Strategy ETF (UTRN) uses a proprietary methodology to create an equal-weighted portfolio, rebalanced weekly, containing the 25 stocks in the S&P 500 Index that endured sharp declines in the prior week, but which have the potential for big rebounds in the following week. The theory behind UTRN has some broad similarities with the Dogs of the Dow and the buy-on-the-dip trading systems, which also are based on expectations that beaten-down stocks will recover.

The UTRN ETF is up by 29.7% year-to-date through Nov. 25, versus 25.0% for the S&P 500. Launched in Sept. 2018, it is based on an index that was backtested to 2006, beating the S&P 500 in 11 of the last 13 years, while averaging more than double the return of the S&P 500, CNN reports.

Key Takeaways

  • The UTRN ETF selects stocks likely to rebound from short-term drops.
  • Its portfolio , drawn from the S&P 500, is rebalanced weekly.
  • Its algorithm roughly doubled the S&P 500's return from 2006 onwards.

Significance for Investors

"Negative news is contagious, many sell-offs are overdone, entire sectors can be oversold," per UTRN sponsor Vesper Capital Management. They note that the concept of "short term reversal" behind this ETF is based on research since 1965, especially 25 years of "testing, simulations, and quantitive research" by Professor Victor Chow of the John Chambers College of Business and Economics at West Virginia University.

A proprietary algorithm, the Chow Ratio, drives the stock selection process used by UTRN. The 25 stocks selected from the S&P 500 each week by applying the Chow Ratio also form the Vesper U.S. Large Cap Short-Term Reversal Index (UTRNX) that is calculated by S&P Dow Jones Indices.

"Short-term stock prices often reflect investor behavioral biases such as overreaction to information, loss-aversion, and other cognitive errors as well as emotional bias," Professor Chow writes. Elaborating on his methodology, he adds: "Instead of using traditional fundamental analysis or asset pricing modeling approach...[the Chow Ratio] simultaneously measures the return-stability (the health) and potential return-reversal,"

"There is a human bias towards loss aversion. People overreact to negative information and sell stocks too fast following negative news. The overreaction causes prices to go down too much and set up the potential for a near-term rebound," Chow told CNN.

UTRN has an expense ratio of 0.75%, much higher than passively-managed ETFs, but this is roughly in line with many actively-managed funds. Assets under management (AUM) are $35.2 million.

While the Dogs of the Dow system, as usually applied, involves an annual portfolio rebalancing, the UTRN ETF portfolio is reset weekly, as noted above. Professor Chow notes that significant declines in transaction costs recently made his approach economic, and he limited his algorithm to the large cap S&P 500 because these are generally the most liquid stocks.

Looking Ahead

As always, the past performance of an investment strategy is no guarantee of its future returns. Moreover, although the UTRN methodology was backtested to 2006, and thus includes the last bear market, most of that period was during a long bull market. Whether UTRN will continue to outperform during the next bear market is an open question.