An Active Bear ETF

Hat tip goes to reader Larry who pointed to a new ETF that recently came on the market. It’s a managed Bear ETF and it works as follows:

The investment objective of the Active Bear ETF (HDGE) is capital appreciation through short sales of domestically traded equity securities. The HDGE portfolio is sub-advised by Ranger Alternative Management, L.P. The portfolio management team implements a bottom-up, fundamental, research driven security selection process. In selecting short positions, the Fund seeks to identify securities with low earnings quality or aggressive accounting which may be intended on the part of company management to mask operational deterioration and bolster the reported earnings per share over a short time period.

In addition, the portfolio management team seeks to identify earnings driven events that may act as a catalyst to the price decline of a security, such as downwards earnings revisions or reduced forward guidance.

There are several reasons listed as to why an investment in HDGE might make sense:

As a Tool to Hedge Equity Exposure – HDGE can be used as part of a long/short strategy in which an investor may synthetically integrate by pairing HDGE with a long-index ETF (or an investor’s portfolio of long positions), providing the investor with a “buy and hold” option to hedge their long domestic equity exposure.

For Diversified Portfolio Construction – The Portfolio Management Team’s portfolio construction process emphasizes diversification across a number of industries and specific companies with a special focus on catalysts that drive lower stock returns. The portfolio will typically consist of between 20-50 equity short positions, with an average position size of between 2% and 7% of the portfolio exposure.

For a Fundamental Investment Process – The HDGE Portfolio Management Team utilizes accounting metrics across the income statement, cash flow statement and balance sheet to identify companies with low earnings quality or possible aggressive accounting practices. These factors may suggest operational deterioration in a company’s business. Qualitative analysis is also considered. An assessment of the management team, accounting practices, corporate governance and the company’s competitive advantage are analyzed before a company is included as part of the HDGE portfolio.

As you would expect, an actively managed ETF has higher annual expenses, and HDGE is no exception. The current net annual expense ratio is listed at 1.85%.

This is a new kid on the block with currently only $26 million under management and no track record. The concept sounds very interesting, but HDGE will need to prove itself for a minimum of some 9 months. That will allow enough time to establish a pricing and trading history to better evaluate how this ETF has fared in various market conditions.

I will report on in it again later on this year.

Disclosure: No Positions

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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