19. ETF Front-Runner Strategy

Published at 1652699855.811


Every public fund must publish an investment prospectus. Index funds must publish details of rebalancing rules. By following these disclosure rules, investors may forecast the next actions of these funds and make a profit by acting ahead.

In the United States, investors following this strategy pocket about $4 billion yearly. The researchers also found most US index funds announce their rebalancing plans in advance. They execute trades at closing prices on index rebalancing days to minimize discrepancies.

The ETF front-runner is a very short-term strategy. To optimize the use of capital, it is necessary to combine it with other strategies. However, this strategy requires constant trading, so fees and taxes can increase multiple times.

In a bearish market, any strategy of taking long positions can incur serious losses. To hedge against market risk, one can consider using a market-neutral strategy. It typically combines buying underlying securities with short-selling derivatives with equal weighting.

Ideas to Apply in Vietnam 

Among index funds in Vietnam, DCVFMVN DIAMOND ETF (FUEVFVND) is the best-known fund with the fastest capital growth in recent years. In the DIAMOND ETF prospectus, the fund’s investment objective is to track the DIAMOND index. Therefore, when it’s possible to forecast a new list of stocks added to the DIAMOND index, investors can make large profits without much risk. It’s because the DIAMOND ETF will likely buy many of these stocks.

Below are a few rules for stocks to be selected in DIAMOND INDEX (2022):

  • Have at least 3 months of listing and trading on HOSE as of the closing date of index periodic review;

  • Adjusted capitalization free-float value of at least 2,000 billion VND;

  • The minimum execution value at 8 billion VND and the trading volume at least 100,000 shares (for shares already in DIAMOND Index from the previous period) or 10 billion VND and 200,000 shares (for shares outside of DIAMOND index from the previous period) to be eligible;

  • The number of stocks in the index is at least 10. FOL of VNDiamond stocks in the previous period is at least 80%, where FOL is defined as: FOL = Foreign investor ownership/Foreign investor holding limit 

  • Stocks in the previous period with P/E at most 3 times the average P/E. For stocks outside of DIAMOND index, P/E is at most 2 times.

  • The proportion is at most 40% for a single industry.

By statistically using the complete set of rules in the prospectus, investors can accurately predict the list of stocks in the DIAMOND Index. Large securities companies like SSI JSC, or VNDirect JSC often make their own predictions. Following and forecasting their reports in advance will optimize profits for a trading system.