We are excited to present the quarterly Global X Adaptive U.S Factor ETF (AUSF) Report. AUSF seeks to outperform traditional market capitalization weighted indexes by allocating across three factors – low volatility, value, and momentum – that have historically demonstrated advantages compared to broad benchmark indexes by tracking the Adaptive Wealth Strategies U.S. Factor Index. The Index utilizes dynamic factor allocation with the goal of low tracking error, minimal internal expenses, downside mitigation, and potential alpha generation within the ETF vehicle, potentially minimizing capital gains expenses. The three factors that the index dynamically allocates to are low volatility, value, and momentum.1
Low volatility is derived from traditional “Modern Portfolio Theory” and the relationship between risk and return. Minimum volatility helps to provide potential stability and diversification inside of the factor adaptation model.
The Value factor is derived from the Fama and French model, suggesting that value stocks tend to outperform growth stocks overtime. Value has the tendency to revert to the mean, meaning that there are times when the value factor can both underperform and outperform.
Momentum is related to behavioral investing and implies that stocks that have recently outperformed will tend to continually outperform. Similarly to value, momentum tends to mean-revert and can outperform and underperform in different cycles.
By tracking the Adaptive Wealth Strategies U.S Factor Index, AUSF utilizes dynamic factor allocation and either allocates to two of the three factors with a 50%/ 50% weighting, or all three factors with a weighting of 40% / 40% / 20% depending on the trailing returns of each factor.
In February 2023, the Index remained allocated to a 50/ 50 split of the 2 factors: Momentum and Low Volatility. It is worth noting that the Index has been in this weighting position since August 2022.2
The overall index tracks sub-indices that represent the three factors. The Momentum factor, derived from the Solactive U.S. Large & Mid Cap Momentum 100 Index TR, contributed positively to AUSF’s 3-month performance, exhibiting a 13% factor return, and Low Volatility, tracked by the Solactive U.S. Large & Mid Cap Minimum Downside Volatility 100 Index TR, returned 8%, both performing positively over the time period. The Value factor, derived from the Solactive U.S. Large & Mid-Cap Index, had a 0% allocation during this time period.
Compared to the S&P 500 index, AUSF’s sector exposure was heavily tilted towards Healthcare (30%) and Energy (15%) and exhibited a lower relative sector exposure to Information Technology (8%). The Financials and Communication Services sectors contributed the most to the fund’s return at 0.48% and 0.44% respectively. This is mostly attributed to the Low Volatility portion of the Index, tracked by the Solactive U.S. Large & Mid Cap Minimum Downside Volatility 100 Index TR, whose exposure to the Financials sector was 15% and to Communications Services sector was 11%. The Momentum factor demonstrated minimal exposure to Financials (4%) and Communication Services (0.08%).
Click the fund name above to view current performance and holdings. Holdings are subject to change. Current and future holdings are subject to risk.