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ARMR Outperformed as the Equity Market Plunged Into Bear Market Territory

April 6, 2020

During March 2020, the -8.37% NAV return of Armor US Equity Index ETF (ARMR) outperformed the -12.51% return of the S&P 500 by 4.14%.[1] Since inception, the fund had a return of -19.08% versus the -22.90% return of the S&P 500, or outperformance of 3.82% for the fund.

Sector Positioning During March
During March, the fund had a 100% allocation to technology stocks through its holding of the Vanguard Information Technology ETF (VGT). As much of the country entered “shelter in place” mode, technology stocks were perceived to be beneficiaries. Technology companies helped to facilitate remote workplace and education solutions as well as offered entertainment options.

Shift to Treasuries for April
The index which underlies the ARMR ETF uses a proprietary Market Performance Indicator (MPI) to estimate which sectors may offer strong, long-term performance potential with lower expected downside risk. The MPI uses a sector’s moving average price as a basis for this factor. When a sector is trading above (below) its moving average, it is included (excluded) in the index.

The sharp market correction that occurred during March created an unusual market environment in which every sector in the S&P 500 is now trading below its moving average. As a result, following its 3/31/20 rebalancing, ARMR has moved to a 100% allocation to Treasury securities.

Higher Returns, Lower Volatility
Given the swiftness and severity of the equity market decline and its resulting volatility, we believe that a move toward Treasuries is warranted. In the charts below, we looked at the performance of equities and Treasuries during the last two bear markets – the Dot Com Bust (3/24/00 – 10/9/02) and the Financial Crisis (10/9/07 – 3/9/09). The following items stand out and underscore our shift into Treasuries.

First, during those periods of market distress, Treasuries outperformed equities by a wide margin. During the Dot Com Bust, Treasuries provided a nearly 39% return, while equities declined over 47%. During the Financial Crisis, Treasures and equities returned 21% and -55%, respectively. Treasuries also exhibited less volatility than equities.

Additionally, there was a negative correlation between Treasuries and equities during these periods of market distress. During the Dot Com Bust, the correlation[2] was -.3137 and during the Financial Crisis, it was -.4173. Thus, Treasuries may add risk-reducing diversification to your portfolio during periods of equity market distress and have the potential to shield your portfolio from large losses.

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Source: Daily returns from Bloomberg. The Dot Com Bust covers 3/24/00 through 10/9/02 and the Financial Crisis covers 10/9/07 through 3/9/09. Indices: Stocks – S&P 500; Bonds – Bloomberg Barclays US Government 10 Year Term Index. Please see disclosures for a full definition of these indices. The referenced indices are shown for general market comparisons and are not meant to represent the Fund. Investors cannot directly invest in an index. Past Performance does not guarantee future results.

Beware of the Bear Market Rally
From its low on 3/23/20, the S&P 500 advanced over 18% by 3/26, raising the question of whether it is too late to allocate to Treasuries.

We cannot, with 100% accuracy predict, future market moves. However, historically, it has been common for equities to rally after sharp declines, only to decline once again to lower lows. Such occurrences are called “bear market rallies.”

For example, the chart below highlights five advances of 5% or more during the Dot Com Bust. These were subsequently followed by large declines in the equity market. During the subsequent declines, Treasuries outperformed equities by a large margin. We also saw the same pattern during the Financial Crisis.

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Source: Daily returns from Bloomberg. The Dot Com Bust covers 3/24/00 through 10/9/02 and the Financial Crisis covers 10/9/07 through 3/9/09. Indices: Stocks – S&P 500; Bonds – Bloomberg Barclays US Government 10 Year Term Index. The referenced indices are shown for general market comparisons and are not meant to represent the Fund. Investors cannot directly invest in an index. Past Performance does not guarantee future results.

We are not surprised to see the equity market rally following the sharp declined that began in February, nor are we surprised to the partial snapback. While we are not predicting that the bear market will persist, history does suggest that there may be further equity market pullbacks. Hence, the portfolio is defensively positioned.

Summary
During March and since its inception, ARMR has outperformed the S&P 500. The fund is currently allocated to Treasuries, which, we believe, offers an attractive risk/return profile during the current economic and market volatility.


[1] Source: Yahoo Finance
[2] Correlation is a measure of the extent to which the prices of assets move together.

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.