Behavior, Momentum & E T F s Aptus Capital Advisors LLC Please see important information on the final pages of this presentation
3 Simple T ruths D istribution of W in to L oss Simple Beats Returns Ratio Complex 2 Please see important information on the final pages of this presentation
/A ptus/ -adapted, suitable, appropriate, fitting WHO | WHAT | WHY Please see important information on the final pages of this presentation
History R efresher 1 952 - Markowitz and Mean Variance Optimization 1 960’s - Capital Asset Pricing Model 1 990’s - Fama and French expanded CAPM to 3 Factor Model 1 997 - Carhart introduces Momo as 4th factor Where are we now - the Factor Frenzy... 4 Please see important information on the final pages of this presentation
C ompeting Market V iews E cons Humans “It’s a choice between being precisely wrong or vaguely right” -Richard T haler 5 Please see important information on the final pages of this presentation
N ormal D istribution??? Chart from L ongboard Capital 6 Please see important information on the final pages of this presentation
Behavioral F inance A better understanding of WHY anomalies COULD exist helps develop better models for investors to gain access E xplaining the W hy -W ho C ares! P ersistenceis what matters 7 Please see important information on the final pages of this presentation
W hy Momentum? S imple | e | S S ystem em | | T T he e E viden ence e 8 Please see important information on the final pages of this presentation
AP T US B BE E H HAV IO R AL M MO ME E N NT UM IN D E E X X Data provided by Solactive – The Aptus Behavioral Momentum Index Calculation Agent January 3, 2006 to January 11, 2017 Aptus Behavioral Momentum Index Cumulative Returns : 167.04% Solactive Large Cap US Index : 127.74% 9 Please see important information on the final pages of this presentation
T he P rocess Rules Based | Risk M anaged | Concentrated MARKET RANKING CONVICTION PULSE 10 Please see important information on the final pages of this presentation
Max ax D D raw awdow own C Com ompar arison on Data provided by Solactive – The Aptus Behavioral Momentum Index Calculation Agent A ptusBehavioral Momentum SolactiveUS L arge C ap Index Index -21.21% -54.73% 11 Please see important information on the final pages of this presentation
W hat A dvisers N eed to Know Potential Risks Due Diligence for ETFs Due Diligence for Mutual Funds The Benefits of Creation and Redemption 12 Please see important information on the final pages of this presentation
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For Illustration purposes, these are the holdings of an ETF fund before a Custom Rebalance The 123 ETF NAV Price - $30 2 Units Outstanding – 50,000 shares per unit Cash Equities Total $1,000,000 $2,000,000 $3,000,000 Holdings Shares ABC 10,000 $1,000,000 XYZ 5,000 $1,000,000
Index Rebalance • The portfolio manager decides to remove ABC • Additionally, the PM would like to get rid of ABC using a custom redemption basket • 1 Standard unit is CREATED per protocol The 123 ETF NAV Price - $30 2 Units Outstanding – 50,000 shares per unit
Standard Creation Unit The 123 ETF has 2 units outstanding – or 100,000 Shares 1 Unit = 50,000 shares An Authorized Participant (AP) delivers the basket of Tickers and Cash and in turn receives back 50,000 shares of the fund The Value of the “In-Kind” Transaction is $1,500,000 This is a typical Creation Cash $500,000 Creation Unit Size 50,000 $30.00 $1,500,000 Ticker To Deliver Shares Last Price ABC 5,000 $100.00 XYZ 2,500 $200.00
Mid Rebalance Holdings The 123 ETF NAV Price - $30 *3 Units Outstanding Additional Shares of Each Name were delivered via Standard Create Cash Equities Total $1,500,000 $3,000,000 $4,500,000 Holdings Shares ABC 15,000 $1,500,000 XYZ 7,500 $1,500,000
Custom Redemption • The PM issues us a custom cusip (only seen by one AP) which instructs AP to redeem the recently created 50,000 ETF shares back to the fund • The custom basket will return back ONLY shares of ABC • The AP will redeem back 50,000 ETF shares in return for 15,000 shares of ABC. (amount held mid-rebalance, slide 4) • Because the amount of unwanted ABC is equal in value to the redemption unit of 50,000 shares – there is not need for cash to make either side whole
Post Rebalance Holdings *Back to 2 Units Outstanding 50,000 ETF shares were redeemed for Entire ABC position Notice ETF total Value stayed the same but cash and rest of portfolio has higher weightings Cash Equities Total $1,500,000 $1,500,000 $3,000,000 Holdings Shares ABC 0 0 XYZ 7,500 $1,500,000
Momentum Recent winners tend to continue winning while recent losers tend to continue losing; in other words, persistence in performance. Sample Returns Sharpe Ratios RMRF Small - Big High - Low Up - Down RMRF Small - Big High - Low Up - Down Size Value MoMo Size Value MoMo 1927-2013 7.7% 2.9% 4.7% 8.3% .41 .26 .39 .50 Sample % Positive, 1-year Rolling Returns % Positive, 5-Year Rolling Returns RMRF Small - Big High - Low Up - Down RMRF Small - Big High - Low Up - Down Size Value MoMo Size Value MoMo 1927-2013 71% 58% 63% 81% 82% 65% 89% 88% Data From Kenneth French’s data Library. Table from the Asness, Frazzini, Israel, and Moskowitz paper, Fact Fiction And Momentum Investing 20 Please see important information on the final pages of this presentation
Important Information This information is furnished in order to provide general investment and administrative information. The investment information is general and educational in nature, does not consider other investments that an individual may own, is not a prediction of external economic conditions, nor considers an individual’s past investment experience. Individuals may wish to seek professional investment counsel before making investment decisions. These analyses have been produced using data provided by the investment managers, third parties, and public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed. Past Performance is not indicative of future results, which may vary. As with any investment strategy, there is potential for profit as well as the possibility of loss. Aptus Capital Advisors, LLC does not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk and investment recommendations will not always be profitable. Past performance does not guarantee future results. This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from Aptus Capital Advisors LLC. Aptus Capital Advisors LLC reserves the right at any time and without notice to change, amend, or cease publication of this information. This material has been prepared solely for information purposes only. Hypothetical performance results (e.g., quantitative backtests) have many inherent limitations, some of which, but not all, are described herein. No representation is being made that any fund or account will or is likely to achieve profits or losses similar to those shown herein. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently realized by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results. The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results. Hypothetical performance results are presented for illustrative purposes only. 21 Please see important information on the final pages of this presentation
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