Is a 130/30 ETF Right for You?
September 22nd, 2009 at 2:00pm by Tom Lydon
In an attempt to gain a competitive advantage, some investors have turned to exchange traded funds (ETFs) that utilize a 130/30 strategy.
Of the ETFs that enable one to gain exposure to this quantitative strategy, the ProShares Credit Suisse 130/30 (NYSEArca: CSM) has drawn the most attention. Daniel Harrison of Index Universe analyzes this ETF in more detail and concludes that CSM has greater tracking error than the average S&P-weighted ETF, which translates into outsized gains compared to the index in certain markets.
Harrison states that CSM is attractive because it can’t take a short position in a stock with a weighting of higher than 0.4% in the S&P, which in conjunction with an increasingly stable market environment, may enable advisors to give clients enhanced U.S. equity focus.
The 130/30 strategy in CSM uses financial leverage by shorting poor-performing stocks and buying stocks that are anticipated to have high returns. CSM tracks the Credit Suisse 130/30 Large-Cap Index. The strategy uses a quantitative analytical system to rank all of the large-cap stocks in the U.S. market, then takes a 130% long position in the high-ranked stocks and a 30% short position in the low ranked stocks.
The ultimate goal of the strategy and the ETF is to generate alpha superior to that of a comparable long-only cap strategy over the long run and generate higher returns.
Another 130/30 fund is the KEYnotes First Trust Enhanced 130/30 Large-Cap ETN (NYSEArca: JFT), an exchange traded note.
The 130/30 strategy is a good, unique one, but it’s important to do your homework and make sure that such a strategy is a good fit for you and your goals.
For more stories on the 130/30 strategy, visit our 130/30 category.
Kevin Grewal contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.