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.