We witnessed some interesting market trends through the first four months of this year. Energy and materials, the two hardest-hit sectors in 2015 (down 23.6% and 10.4%, respectively, last year), suddenly become the market "darlings." Through April 29, energy was up 12.0% for the year and had been the best performer among the 10 broad market sectors. The materials sector was also up 8.0% for the year. Investors have made a major shift by taking a risk-on approach, as once-hot sectors like health care and information technology fizzled. The unexpected role reversals are due in large part to disappointing first- quarter results from big names in info tech and health care, whereas energy and materials stocks outperformed analyst expectations, all while oil and precious metals enjoyed significant price appreciation.

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Source: Reality Shares Research. Past performance does not guarantee future results.

This market disconnect became apparent when we analyzed how one of our Funds, the Reality Shares DIVCON Dividend Defender ETF (DFND) - Get Report  had performed worse than the broad market.

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* DFND Inception Date: Jan. 14, 2016. As of April 29, 2016. Source: Reality Shares Research. 

This ETF invests 75% of its portfolio market value in the large-cap U.S. companies with the highest probability of increasing their dividends within a year, based on their DIVCON dividend health scores. The remaining 25% of the portfolio market value is used to sell short the large-cap U.S. companies with the highest probability of cutting their dividends within a year. As of April 29, nearly half the fund's short portfolio (on a net exposure basis) was comprised of energy and materials names due to their low prospects for future dividend growth. A look at the individual fund holdings may potentially offer a solution for those of you seeking to play the possible risk-on reversal.

The fund's short holdings are Marathon Oil, Pioneer Natural ResourcesAGL Resources, Entergy, EQT, CenturyLink, Freeport-McMoRan, Exelon, FirstEnergy and Newmont Mining. They were up an average of 35% in 2016 through April 29. They even outperformed their respective sector averages during this time. The Fund's top 10 long holdings are Tyson Foods, Fastenal, C.H. Robinson Worldwide, Stryker, Waste Management, TJX Companies, Estee Lauder, Emerson Electric, Tractor Supply and Expeditors International of Washington. They were up an average of 13% in 2016 through April 29, as shown below.

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As of April 29, 2016. Subject to change. Source: Reality Shares Research. Past performance does not guarantee future results.

Fundamentally, many energy and materials stocks are exhibiting warning signs, but investors don't seem to be concerned. Looking at the top 10 short holdings in the Reality Shares DIVCON Dividend Defender ETF, a majority of these names are carrying high amounts of leverage on their balance sheets, especially those in the energy and materials sectors. The average Altman Z-Score for the 10 stocks in the short portfolio is 1.0. A score of less than 1.8 signals a high likelihood of default. According to just-released data from Reuters (in conjunction with Haynes & Boone and bankruptcydata.com), 59 U.S. oil and gas companies have already filed for bankruptcy, and Charles Gibbs of Akin Gump says the U.S. oil industry is not even halfway through its wave of bankruptcies ("U.S. oil industry bankruptcy wave nears size of telecom bust," Reuters, May 4, 2016). Furthermore, the average ratio of levered free cash flow to dividends for these companies is -1,652%. This ratio represents the cash flow available to pay dividends once all obligations are met.

Conversely, the Reality Shares DIVCON Dividend Defender ETF top 10 long holdings have an average Altman Z-Score of 8.1. A score of more than 3.0 is considered to be healthy. The average ratio of levered free cash flow to dividends for these companies is 321.9%, meaning these holdings are well-positioned to make their dividend payments once all obligations are met.

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As of April 29, 2016. Subject to change. Source: Reality Shares Research. Past performance does not guarantee future results. Always consider the risks associated with short selling.

If you believe a reversal of the risk-on trend will take place in the remainder of 2016 and are looking to take advantage of this potential reversal, going long the Reality Shares DIVCON Dividend Defender ETF's top 10 long holdings while going short the its top 10 short holdings may be a potential solution for you. Conversely, if you anticipate the current rally and disconnect will continue and are seeking to participate in this continued trend, going long the Fund's top 10 short holdings while going short the Fund's top 10 long holdings could be a potential solution (always consider the risks associated with short selling).

As an alternative to going short or long the previously mentioned individual stocks, investing in the Reality Shares DIVCON Dividend Defender ETF could be a solution for those who believe the risk-on trend will reverse, while taking a short position in the Reality Shares DIVCON Dividend Defender ETF could be a solutions for those of you who believe the current rally and disconnect will continue (always consider the risks associated with short selling).

The Reality Shares DIVCON Dividend Defender ETF is part of the suite of Reality Shares ETFs designed to create solutions to identify, avoid, mitigate or even capitalize on inflection points in the markets.

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Performance data quoted represents past performance. Past performance is no guarantee of future results and investment return, and principal value of the Fund will fluctuate so that shares when sold may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted. Market price returns are based on the midpoint of the bid/ask spread at 4 pm ET and do not represent the returns an investor would receive if shares were traded at other times. ETF shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Visit realityshares.com for performance data current to the most recent month end. DFND Expense Ratio: 0.95%.

Altman Z-Score: The output of a credit-strength test that gauges a publicly traded company's likelihood of bankruptcy. DIVCON: DIVCON is a dividend health rating system which assesses the likelihood that companies will grow or cut their dividends in the next 12 months. DIVCON 5 indicates the highest probability for a dividend increase and DIVCON 1 the highest probability for a dividend cut.

This material is prepared by Reality Shares, Inc. ("Reality Shares") and is presented for information purposes only. This material does not constitute investment advice and should not be considered a solicitation to buy or an offer to sell securities. It does not take into account any investor's particular investment objectives, strategies, tax status or investment time horizon.

Investors should carefully consider the investment objectives, risks, charges and expenses before investing in Reality Shares ETFs. This and other information can be found in the Fund's prospectus, which may be obtained by calling 855-595-0240 or by downloading the file from realityshares.com. Please read the prospectus carefully before investing.

A Fund's performance for very short time periods may not be indicative of future performance. The recent growth in the stock market has helped to produce short-term returns for some asset classes that are not typical and may not continue in the future.

DFND's investment objective is to seek long-term capital appreciation by tracking the performance, before fees and expenses, of the Reality Shares DIVCON Dividend Defender Index (the "Benchmark Index").

There are risks involved with investing including the possible loss of principal. The Fund's emphasis on dividend-paying stocks involves the risk that a company may cut or eliminate its dividend which may affect the Fund's returns. Investments in swaps, options, and futures and forward contracts are subject to a number of risks, including correlation risk, market risk, leverage risk and liquidity risk, which may negatively impact the Fund's investment strategy and could cause the Fund to lose money. Securities sold short create special risks which may result in increased volatility of returns. As losses on short sales occur from increases in the value of the security sold short, such losses are theoretically unlimited. Investments in short sales may also incur expenses related to borrowing securities. Short sales within the portfolio may result in the fund being less tax-efficient. Please review the prospectus for important risks regarding the Fund, as each of these factors could cause the value of an investment in the Fund to decline over short- or long-term periods. The Fund is new and has a limited operating history.

There is no guarantee or assurance the methodology used to create the Benchmark Index will result in the Fund achieving positive returns. The Fund may be more susceptible to a single adverse economic or other occurrence and may therefore be more volatile than a more diversified fund. The Benchmark Index is constructed using a rules-based methodology based on quantitative models developed by Reality Shares. These quantitative models may be incomplete, flawed or based on inaccurate assumptions and, therefore, may lead to the selection of assets for inclusion in the Benchmark Index that produce inferior investment returns or provide exposure to greater risk of loss.

Copyright © 2016 Reality Shares, Inc. All rights reserved.

This article is commentary by an independent contributor. At the time of publication, the author held shares in DFND.