Since exchange-traded funds, or ETFs, debuted in the 1990s, investing has become a bit like dress-up: Let’s see what else we can put in an ETF uniform.
From index funds to bond funds to actively managed funds, the variety of ETF offerings continues to expand. Today’s investors almost can’t help but eye the ETF in the next person’s portfolio, wondering if they’re missing out on something better.
But fear not, investors: Even this fear of missing out, or FOMO, may no longer be a concern, thanks to the FOMO ETF, an upcoming offering by Collaborative Investment Series Trust that aims to invest in “current and emerging trends.” In other words: all the cool stuff you’re afraid to miss out on.
We spoke with Matthew Tuttle, CEO and chief investment officer of Tuttle Capital Management LLC, the firm managing the FOMO ETF. He discussed how his team will run the fund and how he envisions it fitting into investors’ portfolios. Here are edited excerpts from that interview.
Why did you create the FOMO ETF?
There’s so much going on in the markets: all the social media, Reddit, the rise of the retail investor, hedge funds, special-purpose acquisition companies, the battle between growth and value, all these innovative technologies. You have this fear of missing out — but it’s balanced against FOGK, or the fear of getting killed.
I’m sure we all know people who, over the past few months, have made a small fortune. And we all know people who have lost a ton of money. A lot of times, it just comes down to one or two smart or dumb decisions or timing. What we wanted to do was give the individual investor or financial advisors something where they can regain control. We’re going to give you access to all the FOMO areas — and we’ll do it in a way where you won’t get killed.
How do you avoid “getting killed” when you’re chasing trends?
We do two things: No. 1 is that we have a lot of holdings. I think it’ll be between 75 to 100 holdings. Today, we have about 96. A lot of different funds that are in these FOMO-ish sectors are often very highly concentrated or have large holdings of specific stocks. For example, there’s one fund that a lot of people like that’s approximately 11% in Tesla ( TSLA). So if Tesla has a good day, they have a good day. But if Tesla goes down, they get killed.
We may own Tesla, but it might be a 1% or 0.5% position. We’re not going to have a 10% position in Tesla. We own AMC Entertainment ( AMC), but it’s a 0.5% position. We’re not necessarily going to be up 40% in a month, but we’re also not going to be down 40% in a month.
The other thing we’re going to do is weighting the holdings by volatility. We’re looking at downside volatility: Historically, when one of these stocks drops, how much has it dropped? Stocks with bigger drops get smaller weightings.
Who is your ideal investor for this fund?
I don’t know that there’s necessarily just one. Certainly you’ve got the retail investor who is doing it themselves and trying to figure all this stuff out. We’ve already done it for you.
We’re also getting a lot of interest from financial advisors from two standpoints: The first is they’re getting questions from their clients on all this stuff. So they can say, “Don’t just go out and buy GameStop Corp. ( GME) and AMC — and probably buy them at the wrong time. Buy this fund instead.”
The other thing we talk about is having core and satellite elements to your portfolio. The core should be what you know you’re going to get. The core has no surprises. It does what it does, whether that’s the S&P 500 or defensive equity. Then the satellite is where you get interesting. This fund is a great satellite holding in that context.
How will you pick the stocks for the fund?
We start by trying to figure out what FOMO is today: the stocks that are hot with retail investors and the stocks that are hot with hedge funds.
Then we’ll have what we’d call a trend following basket. Let’s say there are 100 innovative tech stocks, from electric vehicles to cloud computing to cybersecurity to genomics. What I want to do is find the 20 stocks that have the strongest momentum over the last couple of months. Those 20 will get into the fund.
Then I want to find the 20 that have been the weakest over the past week. Here, I’m looking for countertrends: What happens a lot in the markets is over the medium term and long term, things trend. Over the longer term, Tesla is in an up-trend. But over the short term, Tesla can get sold. And what tends to happen is it sells off too far too fast, then snaps back. So what we want to do is find the stocks that are trending over the medium and longer term, but we also want to find stocks that are undervalued in the short term.
Once we have our basket of stocks, we compute how volatile they’ve been. The more volatile stocks on the downside are given smaller weightings in the portfolio. And we rebalance on a weekly basis, so that by the time we decide what’s FOMO, it’s not like we’re waiting a quarter, and something is obsolete.
And this is all done with computer programs?
It’s all quantitative. I am a huge believer in programming the computers and letting the computers make the decisions. Then, if you want to make changes, you make changes to the program. You’re not trying to come in and decide that the computer is saying to sell Apple ( AAPL), but you really love Apple because then your emotions get involved. And it’s really hard to have an opinion on 96 stocks.
The ETF sounds reactionary. In other words, when the market moves, you respond. Doesn’t this run this risk of always being a step behind, even if it’s only a week behind?
We’re trying to get into trends that have started from the momentum side, but maybe we’re getting in and capturing the middle of that move. We’re also trying to get into things that maybe haven’t started. That’s why we have the hedge fund basket. Oftentimes, hedge funds are doing research and identifying things before they’ve hit, and we may capture that stock in our model.
The countertrend part of it is because that’s just how the market works. Stuff goes up too far too fast, gets spanked down, then money rotates back into it. Rather than trying to capture one, we’re saying let’s try to capture them all. That’s how you prevent yourself from getting killed.
You’ve mentioned that the fund is rebalanced weekly. This has the benefit of helping you keep pace with changing trends, but doesn’t it also create costs for the fund and its investors?
There is a trading cost, but I’m not worrying about the trading cost as much as the capital gains tax.
The fund won’t be tax-efficient. My hope is that you buy it, and at the end of the year, we issue you a massive capital gain, and you and your accountant are pretty pissed off, but you made a lot of money. Because that’s the trade-off: If we have a good year, you’re going to pay taxes. My thinking is you’re going to pay taxes anyway, so the only way to avoid taxes is to lose money or keep it in your individual retirement account, or IRA.
How much of an investor’s portfolio should they keep in the FOMO ETF?
I would say, for most people, between 10% to 20%. But if you said, “Hey, Matt, what if I made it 50%?” I wouldn’t argue with you because we aren’t as concentrated as some of the other single-area focus funds.
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