An ETF Play On Laggard Stocks

Investors are hearing plenty about zealous day traders and users of a particular financial app buying left-for-dead stocks only to recognize spectacular gains.

What Happened: For many investors, the idea of buying laggards makes sense. It's knowing when to buy and to take profits that are the hard parts. Fortunately, there's an exchange traded fund for that: the Vesper U.S. Large Cap Short-Term Reversal Strategy ETF UTRN.

UTRN isn't quite actively managed, as it follows the UTRNX Index, but it rebalances weekly and is rooted in the notion that program trading — algorithms — can over-exaggerate stocks' overbought and oversold conditions.

Why It's Important: There's no denying that plenty of previous laggards, like airlines, casino operators and cruise lines, among others, are rebounding. Tempting as that may be, many investors miss out on those moves or don't know when to take gains, subjecting themselves to the potential for a second down move. UTRN uses the Chow Ratio (CR) to solve that problem.

“The conventional measure of price movement volatility, standard deviation, assumes investors treat their winning stocks the same way they treat their losing stocks (i.e. volatility is symmetric),” according to Vesper Capital Management. “However, in many instances, the fear of loss causes investors to sell their downward-trending stocks much sooner than their upward-trending stocks. This overreaction results in significantly more downside price movement than upside price movement causing actual volatility to be asymmetric. Therefore, the CR incorporates an asymmetric measure to more effectively select securities.”

Due to frequent lineup changes, UTRN's sector exposures aren't as important as they are in traditional ETFs. The fund is focused, with just 25 holdings, which is small compared to standard large-cap equity funds. Member firms have weights ranging from 3.77% to 4.54%.

UTRN members include Dow components JPMorgan Chase JPM, McDonald's MCD and Walmart WMT.

Bottom line: UTRN isn't bottom fishing with companies days away from Chapter 11.

What's Next: Data confirms that the UTRN strategy works. The fund is up more than 30% this quarter and almost 3% year-to-date, while the S&P 500 is lower by 0.89%.

Impressively, UTRN ranks in the top 1% of all funds categorized in the Morningstar large-cap blend universe.