An actively managed ETF that bets against stocks by shorting them has profited recently from some well-timed positions in troubled companies.
The $264 million AdvisorShares Active Bear ETF (NYSEArca: HDGE) is up 15.7% for the three months ended June 8, compared with a 2.4% decline for the S&P 500, according to investment researcher Morningstar.
The ETF enjoyed a “windfall” last month when shares of Green Mountain Coffee Roasters (NasdaqGS: GMCR) tumbled 48% on disappointing earnings, The Wall Street Journal reports.
The fund is co-managed by John Del Vecchio and Brad Lamensdorf. [Chart of the Day: Active Bear ETF]
Del Vecchio has a background in forensic accounting and hunts for companies that are aggressive in their accounting practices, a sign that they may be trying to paper over a decline in the business. These companies are shorted on the expectation they will miss earnings or lower guidance.
While Del Vecchio concentrates on the fundamentals, co-manager Lamensdorf specializes in technical analysis. [ETF Spotlight: HDGE]
AdvisorShares Active Bear ETF is not tied to an index. The fund doesn’t use leverage or derivatives, and the portfolio is transparent – investors can see the individual holdings.
Currently, the ETF’s largest short positions are in Goodyear Tire (NYSE: GT), Citigroup (NYSE: C) and Best Buy (NYSE: BBY). [Short ETFs to Play Defense]
The fund charges a management fee of 1.5%, while short interest expense lifts the net expense ratio to 3.29%, according to AdvisorShares. However, the firm has agreed to keep the fund’s total annual operating expenses from topping 1.85%.
“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,” according to AdvisorShares. “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.”
“We’re not like a hedge fund where they’re secretly shorting a company and their clients are paying you for that personal stock selection,” co-manager Lamensdorf said in the WSJ story.
AdvisorShares Active Bear ETF was launched in January 2011.
The fund tries to profit by shorting between 20 and 50 stocks, says Morningstar analyst Samuel Lee in a report on the ETF.
“They look for companies with low earnings quality or dodgy accounting, and they search for potential events that may trigger price drops of a security,” Lee wrote. “By running such a concentrated short portfolio, they will likely deviate from the market quite a bit, so don’t consider this fund a substitute for a traditional inverse ETF. It’s mainly a bet on the manager’s skill and a secondary bet on the direction of the U.S. stock market.”
AdvisorShares Active Bear ETF