Ohio-based Huntington Bancshares (HBAN) launched its second StrategyShares ETF on 7/23/2012, the Huntington US Equity Rotation Strategy ETF (HUSE). This actively managed ETF will weight exposure to domestic sectors based on management’s outlook for capital appreciation (HUSE overview).

The HUSE portfolio managers will select large-cap, mid-cap, and small-cap stocks from the S&P 500, 400, and 600 indexes, respectively. Sectors and industries will be overweighted or underweighted based on a top-down analysis. Factors considered will include the current business cycle, valuation, earnings growth potential, and individual company data. Management will also draw on technical analysis in timing portfolio changes.

Active management always begs the question: Who is management? For HUSE, the answer is Paul Koscik and Martina Cheung of bank affiliate Huntington Asset Advisors. Both have experience as mutual fund portfolio managers and will continue in those roles.

One would hope the website would indicate the current sector composition of a new sector rotation ETF, but that is not the case. What we know is that the managers seem to like familiar names. Top holdings as of 8/2/2012 include:

  • Apple (AAPL) 5.3%
  • Johnson & Johnson (JNJ) 3.4%
  • Pfizer (PFE) 2.7%
  • ExxonMobil (XOM) 2.0%
  • Merck (MRK) 1.9%
  • Abbot Laboratories (ABT) 1.5%
  • AT&T (T) 1.3%

HUSE has a 0.95% initial expense ratio. It is the second Huntington-sponsored ETF. The first, Huntington EcoLogical Strategy ETF (HECO), came out on June 20 and is also actively managed.

Analysis/Opinion: Paul Koscik has been managing Huntington Rotating Markets (HRITX), the mutual fund version of this new ETF, since December 2001. During that 10+ years, HRITX returned +4.2% annually while the S&P 500 returned +3.7%.

Martina Cheung has managed the Huntington Technical Opportunities (HTOTX) mutual fund, with assistance from Paul Koscik, since its inception in May 2008. HTOTX has returned -9.9% annually since inception versus +1.6% for the S&P 500.

While some sector overweighting is evident from the holdings, pharmaceuticals for example, a more important factor is that HUSE is heavily tilted to highly liquid large-cap stocks. This illustrates another problem within the actively managed ETF concept. Since portfolio changes are disclosed immediately, the manager’s ability to add value through stock selection or trade execution is severely hampered. The result is often a liquidity-driven portfolio with an active-management price tag. We love the idea of sector rotation and believe it has great potential. We remain skeptical, however, that active management and transparency can successfully co-exist in the same ETF.