Exchange Traded Funds (ETFs)


The goal of the Exchange Traded Funds strategy is to capture capital appreciation. Capstone Investment strives to reach its goal by investing in Exchange Traded Funds (ETFs) that have the appropriate risk classification, risk/reward payoff and relative strength.

Fund Strategy

Each month, Capstone selects 5 to 15 investments meeting three criteria. The investments are held for as long as they meet the three criteria. Once an investment no longer meets the criteria, it is demoted from the portfolio and a new investment that meets all three criteria is advanced to the portfolio. The investment decision is based on a monthly review of the portfolio unless global and/or portfolio specific events require more frequent review.

Capstone will “hedge” or reduce market exposure when the reward presented by the market is unfavorable based on the risk seen in the valuation and the economic growth in the economy. Valuations based on price-to-earnings and/or present value of cash flow, are combined with our risk/reward matrix to drive decisions on reducing market risk. Specific strategies for hedging the market include purchasing exchange traded funds that increase (decrease) in value when the underlying index (S&P 500, NASDAQ 100 or Russell 2000) declines (increases) in value. Capstone may also choose to use leveraged inverse funds. These funds’ objective is to move in the opposite direction of the market by twice the amount of the market. We will limit the use of these funds to 50% of the account value at the time of investment.

Selection Process

Investments are selected if they meet the following three criteria:

Risk Analysis: Comprised of a Value at Risk (VAR) score that ranks the probability of standard deviation (volatility) for the investment.

Risk/Reward Matrix: Computes the potential return versus the underlying risk of a specified investment based on potential earnings growth and valuation.

Relative Strength: Compares the investment’s 6-month and 12-month returns relative to all the other investment options available to us. This indicates that others agree with our valuation analysis and is our way of avoiding value traps-investments that look compelling on valuation, but lack investment appeal, and are more likely to decline in value.