2023-06-21 05:01:54 ET
Summary
- The TUG ETF uses proprietary models and signals to time the markets. Its goal is to stay fully invested during bullish environments and reduce exposure during bearish market conditions.
- So far in its limited history, the TUG ETF has underperformed in both bullish and bearish phases.
- I recommend investors avoid this ETF until there is more evidence of it delivering on its promise.
The STF Tactical Growth ETF ( TUG ) attempts to use proprietary quantitative models and signals to 'time the markets', staying fully invested during bull markets and reducing exposure during bear markets.
So far in the fund's 1-year history, it has lagged a passive ETF in both bull and bear phases. I fear what the fund is trying to deliver is impossible and recommend investors stay on the sidelines.
Fund Overview
The STF Tactical Growth ETF is an actively managed ETF that seeks to provide long-term capital appreciation.
Using the manager's proprietary models and signals, the TUG ETF aims to reduce equity exposure in bearish market environments while remaining fully invested during bullish market environments.
The TUG ETF has $151 million in assets and charges a 0.65% expense ratio.
Strategy
According to the TUG ETF's marketing literature, the Tactical Unconstrained Growth ("TUG") Model uses a series of momentum, correlation, and volatility trends to determine the appropriate exposure to the Nasdaq 100 Index. When the model is not fully invested, it deploys excess capital to risk off assets like treasury bonds and bills.
The TUG Model attempts to exploit the inefficiencies of a traditional 60/40 model portfolio by avoiding volatile days. The TUG model supposedly avoided 75% of the 40 most volatile days in the past 15 years (Figure 1).
Figure 1 - TUG ETF claims its signals avoided 75% of the most volatile days in the past 15 years (TUG whitepaper)
In the manager's opinion, avoiding the 20 best and 20 worst days provides similar total returns with less volatility, improving the overall investment experience (Figure 2).
Figure 2 - Avoiding most volatile days delivers similar returns with less volatility (TUG whitepaper)
Portfolio Holdings
The top 10 holdings of the TUG ETF as of June 20 are shown in Figure 3.
Figure 3 - TUG ETF top 10 holdings (stfm.com)
Investors should note the ETF currently has 47.4% of the portfolio invested in treasury notes. This suggests the TUG model is currently cautious on the markets, with 'cash' accounting for roughly half the portfolio.
Furthermore, this is quite a dramatic change from as recently as March 31, 2023, when the fund appears to have been fully invested, judging by the weight of Microsoft, which is ~13% of the Nasdaq 100 Index (Figure 4).
Figure 4 - TUG was fully invested as of March 31, 2023 (TUG factsheet)
Distribution & Yield
The TUG ETF pays a nominal quarterly distribution with trailing 12 month distribution of $0.34 / share or 1.2% (Figure 5). The latest quarterly distribution annualizes to a 1.4% yield.
Figure 5 - TUG distribution yield (Seeking Alpha)
Returns
Figure 6 shows the TUG ETF's historical performance, reported by Morningstar. The TUG ETF was incepted in May 2022, so there is not a lot of historical performance to analyze.
Figure 6 - TUG historical returns (morningstar.com)
The TUG ETF has done well, with YTD returns of 24.3% to May 31, 2023, and 1Yr returns of 7.4%.
The best comparison for the TUG ETF is the Invesco QQQ Trust ( QQQ ), which tracks the performance of the Nasdaq 100 Index. Figure 7 shows the historical performance of the QQQ ETF to May 31, 2023.
Figure 7 - QQQ historical returns (morningstar.com)
Investors should note that although the TUG ETF has delivered strong returns overall, it has underperformed the QQQ ETF on both YTD and 1Yr returns.
I believe this result should be expected, as by design, the TUG ETF is trying to reduce the volatility of the portfolio, which should come at the expense of returns. What is important is whether the TUG ETF is able to reduce portfolio drawdowns.
Does The TUG ETF Perform As Designed?
Another way to think about the TUG ETF's performance is to split the analysis into two time periods; Since inception to January 31, 2023 when the QQQ ETF was still in a 'bear trend', as characterized by QQQ price trading below its 200 day moving average, and from January 31, 2023 to Present, when the QQQ ETF is in a 'bull trend', characterized by price trading above its 200 day moving average (Figure 8). The 200 day moving average is a common demarcation line used by traders to distinguish between bull and bear trends.
Figure 1 - QQQ bull vs bear trend (Author created with price chart from stockcharts.com)
In the 'bear trend' phase, the TUG ETF underperformed the QQQ ETF, returning -8.0% in total returns compared to 1.0% in total returns for the QQQ (Figure 9).
Figure 9 - TUG underperformed in bear (Seeking Alpha)
In the current 'bull trend' phase, the TUG ETF is also underperforming the QQQ ETF, returning 22.0% compared to 25.1% for the QQQ (Figure 10).
Figure 10 - TUG underperforming in bull (Seeking Alpha)
So far, in the ETF's limited operating history, the TUG ETF has not been able to deliver on its stated goal of protecting drawdowns and reducing exposure during bear markets, as the TUG ETF significantly underperformed the QQQ ETF from inception to January 31, 2023.
It has however, tracked the bull phase fairly well, although performance has started to lag in recent days, probably due to the fund's reduced exposure. Time will tell whether the TUG ETF's recent decision to reduce exposure to 50% was the correct one.
Conclusion
The TUG ETF attempts to stay fully invested during bull markets and reduce exposure during bear markets using a series of trend following, volatility, and correlation signals. So far in the fund's limited operating history, the TUG ETF has underperformed the passive QQQ ETF, which tracks the Nasdaq 100 Index, in both bear and bull phases of the market. I recommend investors stay on the sidelines until we can objectively see the TUG ETF outperform through a cycle.
My gut tells me the TUG ETF is attempting to deliver on the impossible.
For further details see:
TUG: Not Delivering On Its Promise