Long/short equity ETFs

Introduction

There are 9 ETFs that use long/short trading as an investment strategy. Long/short equity trading is where you build a portfolio that mostly consists of "good" stocks that you are going long with, supplemented by "bad" stocks that you are selling short. The most common long/short strategy is probably the "130/30" strategy, where you try to obtain a net 100% long exposure by going 130% long and 30% short. Although it is considered to be an "alternative" investment strategy, it can be successfully used as part of a core "long" portfolio.

The key to success with a long/short strategy is to successfully identify "good" stocks and "bad" stocks. Each of the long/short ETFs follow indexes that use different approaches, so you have to read the ETF's prospectus for details. But let's run through a couple of the ETFs as examples.

FLAG, the WeatherStorm Forensic Accounting Long-Short Fund ETF, follows the WeatherStorm Forensic Accounting Long-Short Index, which uses "six distinct forensic accounting and valuation factors for scoring and ranking stocks -- cash flow quality, revenue recognition, earnings quality, shareholder yield, earnings surprise, and valuation. The combined score provides a metric to assess the relative attractiveness/unattractiveness for long/short index exposures."

CSM, the ProShares Large Cap Core Plus ETF, follows the Credit Suisse 130/30 Large Cap Index, which selects long and short positions using an "expected alpha" score. The "Alpha" score for each stock is based on 50 factors including fundamental data from financial statements, consensus earnings forecasts, market pricing and volume data. These 50 factors are grouped into ten equal-weighted factor composites in the following categories: 1) Traditional Value; 2) Relative Value; 3) Historical Growth; 4) Expected Growth; 5) Profit Trends; 6) Accelerating Sales; 7) Earnings Momentum; 8) Price Momentum; 9) Price Reversal; and 10) Small Size.

Andrew Lo and Pankaj Patel published an influential paper in 2008 called 130/30: The New Long-Only that explains and analyzes in detail the Credit Suisse 130/30 approach. Even though it is very technical, and at times hard to follow, it is well worth the read.

Here are the long/short equity ETFs, if you want to read more about their strategies:

SymbolDescriptionInception DateLifetime Total ReturnSPY Total ReturnActions
CSMProShares Credit Suisse 130/30 ETF2009-07-13302%306%Analyze
DBEHiM DBi Hedge Strategy ETF2019-12-185%3%Analyze
DFNDDIVCON Dividend Defender ETF2016-01-1451%81%Analyze
DIVAQuantShares Hedged Dividend Income ETF2015-01-147%77%Analyze
FTLSFirst Trust Long/Short Equity ETF2014-09-0845%78%Analyze
QLSIQ Hedge Long/Short Tracker ETF2015-03-2329%68%Analyze
QMJDirexion S&P 500 High minus Low Quality ETF2020-02-054%-2%Analyze
TAAGTrend Aggregation Aggressive Growth ETF2020-05-0811%12%Analyze
TADSTrend Aggregation Dividend Stock ETF2020-05-085%12%Analyze

Conclusion

FLAG and CSM are interesting ETFs that many investors should look at. One thing we do at StockMarketMBA.com is give each ETF a rating for long term investors. We have given FLAG and CSM a rating of "Incomplete".

We don't have access to the back-test data for the indexes behind FLAG and CSM. So we can't really tell how FLAG and CSM will perform in a down turn in the market. FLAG and CSM have performed well during the bull market of the last few years, but without any sense of how a long/short equity strategy works in a down turn (such as what happened in 2008) it is hard to give these ETFs a higher rating.


All data is a live query from our database. The wording was last updated: 01/08/2019.

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