Defender ETF Does Only Half the Job
Roger Nusbaum
06/20/07 - 10:54 AM EDT
Late last year I
wrote about the
Claymore/Sabrient Defender ETF(DEF) and was generally positive on it. Half a year later, results are solidly mixed. This is still a great core holding for broad exposure, but as a defense play, it has yet to prove itself.
The basic idea behind this fund is that it should do well when the market goes down.
The exact methodology is proprietary, but every quarter it rebalances to take into account what did well on bad days around the time of the rebalancing.
That seems more sophisticated than loading up on high-yielding food stocks, which was what I thought the fund would do when I first heard about it.
I also couldn't believe how spectacular this fund's backtest was. Obviously, any fund that could be thought of as niche-y or gimmicky will have a great backtest -- they wouldn't bring it public if it didn't look good in backtests -- but as you can see, DEF's looks very solid.
In that column, as I often do, I suggested that anyone interested in using broad-based products in their portfolio might want to keep tabs on this fund to see how it does for a while. Six months later may not be a very long time, but the fund has done very well since hitting the market, outperforming the
S&P 500 by a substantial 3.1%.
DEF has also outperformed large-cap value in the form of the
iShares S&P 500 Value ETF(IVE), which I suggested in my last column might be a useful counterpoint. DEF beat IVE by 2.2% over the same time period.
It's clear to me that the concept deserves the benefit of the doubt in terms of being a better mousetrap for broad exposure. There is no guarantee for the future, but Claymore thought the methodology would be superior, and the fund has delivered not only in the backtest but with several months of actual trading.
It becomes all too easy to dismiss something as a gimmick and to be fearful of thin volume (and to be clear, with DEF's average daily volume around 14,000 shares, there hasn't been much interest). But in the context of a core holding that won't be sold next month, DEF is off to a great start with some correlation and significant outperformance.
That's the good. Now for the "Well, what are we to make of this?" part:
The really big idea with the Defender ETF is that it aims to offer some measure of protection "during periods of weakness in the markets and/or the American economy overall."
On this point, the result is not overwhelming.
As you know, the market had a stress test during the first quarter of this year. If you look closely at the chart, you can see that DEF fared a little better than the market some days but worse than the market some others. You can decide for yourself whether it offered shelter from the market during that storm or not.
On Feb. 27, DEF was down 3.0% and the S&P 500 was down 3.47%. DEF captured a lot of the day's decline but did spare holders a little of the pain. Anyone who was truly worried on that day might have found some solace in DEF, but as the chart shows, that comfort would have turned as the ETF ebbed and flowed throughout the monthlong market spasm.
My take on this is that as a broad-based vehicle, DEF does have a lot of merit. But during periods of short-term market stress, I'm not sure it would provide much benefit. As many readers have noted, during short-term, market-related stress tests, correlations tend to go up, meaning everything goes down on days like Feb. 27.
Since DEF's inception, we haven't had a lengthy decline, so it is possible that DEF could really kick into gear in that circumstance. I wouldn't count on it, but would welcome it if it happened. In the meantime, I'll keep watching this one.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Claymore/Sabrient Defender ETF to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
