While the stock markets have rallied on improving economic outlook, strong consumer sentiment and a strengthening labor market, many experts have started to wonder if the five and a half-year bull run is running out of steam on the back of growing Fed rate-hike chatter and geopolitical tensions.
First Trust, the Il-based sixth largest US issuer of exchange-traded funds known in part for its AlphaDex series, introduced a new fund that seeks to provide investors long-term total return in uncertain times. The newly-launched First Trust Long-Short Equity ETF (FTLS) can take long and short positions in US and international equities listed in US with an aim to profit from both rising and falling market conditions.
FTLS is an actively-managed fund and uses earnings-quality for stock screening and intends to employ the Sabrient/Gradient’s EQR model ranking for security selection. The new fund will build long positions in stocks that have high earnings quality and short stocks deemed to have low earnings quality.
Research by Gradient Analytics and Sabrient Systems showed companies with conservative accounting practices managed to give higher stock returns (higher-quality earnings) compared to those with more aggressive accounting practices (lower quality earnings).
The long-short methodology employed by FTLS acts as a hedge in bear markets and has the potential to temper large downsides. Additionally, First Trust also employs fundamental and quantitative methods to calculate the size and optimum level of risks for the short positions in the portfolio.
The new ETF can allocate 80-100 percent of total fund assets in long positions while short position build-ups could vary between 0-50 percent. FTSL’s well-diversified portfolio consists of 235 stocks with Walmart (3.35 percent), Home Depot (3.21 percent) and Simon Property Group (2.92 percent) occupying the top three slots on the “long” side of the portfolio. Hershey (0.42 percent), AT&T (0.41 percent), M&T Bank (0.41 percent) and Wells Fargo (0.41 percent) are the top draws on the “short” side of the portfolio.
FTLS has an annual expense ratio of 0.99 percent, which is a tad higher than its likely-biggest competitor in the space – the passively-managed ProShares RAFI Long/Short ETF (RALS).
Disclosure: No holdings