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Is It Too Late for a Defensive Strategy?

April 23, 2020

Is It Too Late for a Defensive Strategy?
Fears over coronavirus pushed the equity market into bear market territory on 3/12/20.* With the equity market having already dropped so much, is it too late to invest in a defensive equity strategy?

*Source: Yahoo Finance. Past performance does not guarantee future results. The referenced index is discussed for informational purposes only and is not meant to represent the Fund. Investors cannot directly invest in an index.

We believe that the answer is no.

The Armor US Equity Index ETF (ARMR) aims to provide defensive equity exposure by utilizing a strategy that we feel is appropriate in all market environments.

The Market May Continue to Fall
Just because the market has already fallen into correction territory doesn’t mean that it will not fall further. Cases of coronavirus are still rising. Health officials still do not have a handle of how much further the illness will spread and how to stop its increase.

With the illness still spreading and the inability to estimate its ultimate course, it is nearly impossible to estimate the economic impact. But, we do know that supply chains have been disrupted, and consumer behavior is changing. In some places, public events are being canceled and banned. People are beginning to curtail travel and limiting their public outings.

If the disease continues to spread and businesses and consumers continue to retrench, the economic impact may be substantial – perhaps even a recession.

Until this uncertainty is resolved, markets will likely remain volatile and may fall further.

Unknown Unknowns
We also have no way of knowing if there is some future event that may cause more panic in the equity markets. Six months ago, no one would have guessed that the next market decline would be caused by fears of a global pandemic.

Thus, there is the potential that unknown events in the future could negatively impact the equity market.

Defensive Strategies Still Provide Some Equity Exposure
For the most part, defensive strategies still provide some equity exposure. They just look to do it with less volatility. Often, the cost of lower volatility is lower returns when the market is rising sharply.

The Armor US Equity Index ETF (ARMR)
The Armor US Equity Index ETF (ARMR) seeks to provide investment returns that, before fees and expenses, correspond generally to the total return performance of the Armor US Equity Index. The index is designed to provide exposure to the sectors of the US equity market that the fund’s index provider believes are most likely to generate positive returns while providing downside protection and experiencing lower volatility relative to the US equity market.

Investment Process Designed to Deliver in All Equity Environments
The index which serves as the basis for ARMR uses sector momentum, which looks to invest in sectors which have been experiencing positive performance, in an aim to achieve its goal. Academic research has underscored sector momentum as an attractive investment strategy.

Chen, Jiang, and Xhu, found that there are significant positive returns to sector momentum.[1] Further, they found that sector ETFs are readily available, and thus, a strategy utilizing sector returns is implementable with reasonable transaction costs.

Faber also wrote a paper highlighting the potential, above-benchmark returns that can be achieved through a strategy utilizing sector momentum.[2]

Summary
Although the market has already experienced a correction, we feel that it is still prudent to invest in a defensive equity strategy.

With sector momentum as the basis for its investment process, ARMR may be an attractive vehicle for investors to gain exposure to a defensive equity strategy.

It should be noted that in an extreme market environment, ARMR may shift to a 100% weighting in US Treasury obligations.


[1] Chen, Linda H.; Jiang, George J. & Xhu, Kevin X., Do Style and Sector Indexes Carry Momentum, 8/28/11
[2] Faber, Mebane, Relative Strength Strategies for Investing, April 2010

Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s prospectus and Summary Prospectus, which may be obtained by visiting https://armoretfs.com/documents. Read the prospectus and Summary Prospectus carefully before investing.

Foreside Fund Services, LLC, distributor.

Investing involves risk, including possible loss of principal. The Fund’s return may not match or achieve a high degree of correlation with the return of the Index. To the extent the Fund’s investments are concentrated in or have significant exposure to a particular issuer, industry or group of industries, or asset class, the Fund may be more vulnerable to adverse events affecting such issuer, industry or group of industries, or asset class than if the Fund’s investments were more broadly diversified. Issuer-specific events, including changes in the financial condition of an issuer, can have a negative impact on the value of the Fund.

A new or smaller fund is subject to the risk that its performance may not represent how the fund is expected to or may perform in the long term. In addition, new funds have limited operating histories for investors to evaluate and new and smaller funds may not attract sufficient assets to achieve investment and trading efficiencies.

Shares are bought and sold at market price (closing price) not net asset value (NAV) and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined) and do not represent the return you would receive if you traded at other times.