Market Neutral ETF

French asset manager Amundi has listed Europe’s first market neutral ETF in Paris , the Amundi European Equity Multi Factor Market Neutral ETF (MKTN), marking a new milestone for sophistication in European passive products.

MKTN has two prongs, which when synthesised make for a complex product.

First, as its name suggests, MKTN uses a multi-factor investment strategy. This approach – sometimes called smart beta – tracks and weights companies by a selection of factors. MKTN uses six factors, which in itself is different.

Most multi-factor index providers will usually go for three or four factors. The pace preferred by MSCI in its major multi-factor indexes is four factors (quality, value, momentum, size). S&P’s major multi-factor indexes use three.

Second, and what makes MKTN a first-of-a-kind in Europe, is it bolts on a market neutral approach to the factors. (Market neutral ETFs have existed in the US for several years. They are new to Europe, however.)

What is a market neutral fund? Well, as the name suggests, market neutral products take a neutral view of the market. (In the jargon, they try to achieve a beta of zero relative to their benchmarks). To achieve this, market neutral funds buy both long and short positions on similar stocks so that they make gains (and losses) whichever way the market moves. In a raging bull market this may mean that a market neutral fund misses out on huge gains. But it also means that during a flash crash or financial crisis, a market neutral fund can avoid huge losses.

Amundi has brought these two strategies – multi-factor and market neutrality – under a single heading by using two iStoxx indexes: the iStoxx Europe Multi-Factor Index, which it longs and draws its factor exposure from; and the STOXX® Europe 600 Futures Roll index, which it shorts and gets its market neutral position from.

For MKTN to produce a positive return, one of two things must happen. In an upward-trending market, the multi-factor index must make more money than the money (presumably) lost by shorting Europe 600 futures. Or, in a downward-trending market, the money made shorting Europe 600 futures must exceed what would likely be lost by longing the multi-factor index. According to the index factsheet, year-to-date performance of MKTN’s index is -2.9%.

With the listing of MKTN, European retail investors will have access to a complex investment strategy that was previously available only to those with assets in hedge funds and investment banks.

MKTN will be rolled out onto other European stock exchanges in the coming weeks, Amundi said in a press release.