We witnessed some interesting market trends through the first four months of this year. Energy and Materials, the two hardest hit sectors in 2015 (down 23.6% and 10.4%, respectively), have suddenly become the market “darlings.” Through April 29, 2016, Energy is up 12.0% for the year and has been the best performer among the 10 broad market sectors. The Materials sector is also up 8.0% for the year. Investors have made a major shift by taking a risk-on approach, as once-hot sectors like Health Care and Info Tech have fizzled. The unexpected role reversals are due in large part to disappointing first quarter results from big names in Info Tech and Health Care, whereas Energy and Materials stocks have outperformed analyst expectations, all while oil and precious metals have enjoyed significant price appreciation year-to-date. Source: Reality Shares Research. Past performance does not guarantee future results. If you believe a reversal of this risk-on trend will take place in the remainder of 2016 and are looking to take advantage of this potential reversal, the Reality Shares DIVCON Dividend Defender ETF (TICKER: DFND ) could be the solution for you. DFND invests 75% of its portfolio market value in the large-cap U.S. companies with the highest probability of increasing their dividends within a year, based on their DIVCON dividend health scores. The remaining 25% of the portfolio market value is used to short the large-cap U.S. companies with the highest probability of cutting their dividends within a year. As of April 29, 2016, nearly half of the Fund’s short portfolio (on a net exposure basis) was comprised of Energy and Materials names due to their low prospects for future dividend growth, potentially offering a solution for investors seeking to play the possible risk-on reversal. Click to enlarge Subject to change. Source: Reality Shares Research. Past performance does not guarantee future results. Fundamentally, many Energy and Materials stocks are exhibiting warning signs, but investors don’t seem to be concerned. Looking at the top 10 short holdings in DFND, a majority of these names are carrying high amounts of leverage on their balance sheets, especially within the Energy and Materials sectors. The average Altman Z-Score for the 10 stocks in the short portfolio is 1.0 – a score below 1.8 signals a high likelihood of default. According to just-released data from Reuters (in conjunction with Haynes & Boone and bankruptcydata.com), 59 U.S. oil and gas companies have already filed for bankruptcy, and Charles Gibbs of Akin Gump says the U.S. oil industry is not even halfway through its wave of bankruptcies (” U.S. oil industry bankruptcy wave nears size of telecom bust ,” Reuters, May 4, 2016). Furthermore, the average ratio of Levered Free Cash Flow-to-Dividends for these companies is -1,652%. This ratio represents the cash flow available to pay dividends once all obligations are met. Top 10 Short Holdings As of April 29, 2016. Subject to change. Source: Reality Shares Research. Past performance does not guarantee future results. On the flip side, DFND’s top 10 long holdings have an average Altman Z-Score of 8.1 – a score above 3.0 is considered to be healthy. The average ratio of Levered Free Cash Flow-to-Dividends for these companies is 321.9%, meaning these holdings are well-positioned to make their dividend payments once all obligations are met. The Fund’s short holdings are up an average of 35% year-to-date (through April 29, 2016), even outperforming their respective sector averages during this time. The Fund’s top 10 long holdings are up an average of 13% year-to-date (through April 29, 2016), as shown below. If you believe this performance trend may reverse, DFND could be a potential solution for you. Top 10 Long Holdings As of April 29, 2016. Subject to change. Source: Reality Shares Research. Past performance does not guarantee future results. Regardless of whether a trend reversal takes place in the near-term, DFND and its Benchmark Index are designed to capitalize on the theory that, over time, companies that consistently grow their dividends tend to have investment returns above the overall market and companies that cut their dividends tend to have investment returns below the overall market. In addition, the Fund’s hedged portfolio construction may provide more stable returns, with lower volatility and market correlation. For those of you who anticipate that the rally in Energy and Materials names will continue and are seeking to participate in this continued trend, avoiding or taking a short position in DFND could be potential solutions ( always consider the risks associated with short selling ). DFND is part of the suite of Reality Shares ETFs designed to create solutions to identify, avoid, mitigate, or even capitalize on inflection points in the markets. * DFND Inception Date: January 14, 2016. As of April 29, 2016. Source: Reality Shares Research. Performance data quoted represents past performance. Past performance is no guarantee of future results and investment return, and principal value of the Fund will fluctuate so that shares when sold may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted. Market price returns are based on the midpoint of the bid/ask spread at 4 pm ET and do not represent the returns an investor would receive if shares were traded at other times. ETF shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Visit realityshares.com for performance data current to the most recent month end. DFND Expense Ratio: 0.95%. Disclaimer Cons Disc: Consumer Discretionary. Cons Stap: Consumer Staples. Info Tech: Information Technology. Telecom Svcs: Telecommunication Services. Altman Z-Score: The output of a credit-strength test that gauges a publicly traded company’s likelihood of bankruptcy. DIVCON: DIVCON is a dividend health rating system which assesses the likelihood that companies will grow or cut their dividends in the next 12 months. DIVCON 5 indicates the highest probability for a dividend increase and DIVCON 1 the highest probability for a dividend cut. This material is prepared by Reality Shares, Inc. (“Reality Shares”) and is presented for information purposes only. This material does not constitute investment advice and should not be considered a solicitation to buy or an offer to sell securities. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment time horizon. Investors should carefully consider the investment objectives, risks, charges and expenses before investing in Reality Shares ETFs. This and other information can be found in the Fund’s prospectus, which may be obtained by calling 855-595-0240 or by downloading the file from realityshares.com. Please read the prospectus carefully before investing. A Fund’s performance for very short time periods may not be indicative of future performance. The recent growth in the stock market has helped to produce short-term returns for some asset classes that are not typical and may not continue in the future. DFND’s investment objective is to seek long-term capital appreciation by tracking the performance, before fees and expenses, of the Reality Shares DIVCON Dividend Defender Index (the “Benchmark Index”). There are risks involved with investing including the possible loss of principal. The Fund’s emphasis on dividend-paying stocks involves the risk that a company may cut or eliminate its dividend which may affect the Fund’s returns. Investments in swaps, options, and futures and forward contracts are subject to a number of risks, including correlation risk, market risk, leverage risk and liquidity risk, which may negatively impact the Fund’s investment strategy and could cause the Fund to lose money. Securities sold short create special risks which may result in increased volatility of returns. As losses on short sales occur from increases in the value of the security sold short, such losses are theoretically unlimited. Investments in short sales may also incur expenses related to borrowing securities. Short sales within the portfolio may result in the fund being less tax-efficient. Please review the prospectus for important risks regarding the Fund, as each of these factors could cause the value of an investment in the Fund to decline over short- or long-term periods. The Fund is new and has a limited operating history. There is no guarantee or assurance the methodology used to create the Benchmark Index will result in the Fund achieving positive returns. The Fund may be more susceptible to a single adverse economic or other occurrence and may therefore be more volatile than a more diversified fund. The Benchmark Index is constructed using a rules-based methodology based on quantitative models developed by Reality Shares. These quantitative models may be incomplete, flawed or based on inaccurate assumptions and, therefore, may lead to the selection of assets for inclusion in the Benchmark Index that produce inferior investment returns or provide exposure to greater risk of loss. Copyright © 2016 Reality Shares, Inc. All rights reserved. RLT000410 Exp. 12/31/2016. Disclosure: I am/we are long TSN, FAST, CHRW, SYK, WM, TJX, EL, EMR, TSCO, EXPD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The DFND ETF is also short MRO, PXD, GAS, ETR, EQT, CTL, FCX, EXC, FE, and NEM.