New ‘Forensic Accounting’ ETF
January 31st 2013 at 3:22pm by Tom Lydon
Exchange Traded Concepts, an exchange traded fund service facilitator, has launched a “forensic accounting” fund that selects stocks based on earnings quality.
On Thursday, the Forensic Accounting ETF (NYSEArca: FLAG) began trading. John Del Vecchio, CFA, an Index principal and forensic accountant, is behind the Del Vecchio Earnings Quality Index, which was created for the new ETF. FLAG has a 0.85% expense ratio.
Del Vecchio is a co-portfolio manager at AdvisorShares Active Bear ETF (NYSEArca: HDGE). [Short Bets Pay Off for Bear ETF]
The new ETF will be passively managed, but it will follow the new growing class of rules-based or “intelligent” indexing strategies that mimic actively managed styles.
The Del Vecchio Earnings Quality Index assigns 500 large-cap stocks a grade of A through F based on Del Vecchio’s “earnings quality” methodology. The index looks for aggressive revenue recognition, inventory issues, reserve concerns, large changes in operation expenses, large changes in operation income and tax issues. The index would then exclude F ranked stocks, instead of shorting them. [First ‘Forensic Accounting’ ETF Planned]
Additionally, stocks are weighted by earnings quality. Companies ranked the highest in earnings quality make up 40% of the index, whereas rank B, C, D earnings quality firms receive a 20% weighting.
Consequently, the portfolio will screen out companies with aggressive accounting practices and only hold firms with high quality earnings, according to the press release.
“FLAG seeks to track an index of stocks based on the science of forensic accounting. The proprietary accounting analysis at the individual stock level identifies financial weakness – so called red flags – and financial strength,” J. Garrett Stevens, CEO of Exchange Traded Concepts, said in the press release. “We believe FLAG, which seeks to reduce the investment risk in equities, is a unique and timely ETF for investors.”
For more information on new fund products, visit our new ETFs category.
Max Chen contributed to this article.
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