Investors looking to be market neutral can exercise that view with long/short exchange traded funds, or those ETFs that feature both long and short positions.
One of the new additions to that group is the First Trust Long/Short Equity ETF (NYSEArca: FTLS), an actively managed fund that debuted in September.
FTLS can take long and short positions in U.S. and international equities, using earnings quality as a primary determinant of stock selection. FTLS will establish long positions in stocks deemed to have high earnings quality while short positions will be implemented in low earnings quality names. [New Long-Short ETF Debuts]
FTLS can hold 80% to 100% in long positons while up to 50% of its portfolio can be allocated to short positions. The fund has returned an impressive 10.1% since coming to market, making it one of the top-performing long/short ETFs over that period.
“Critics will be quick to point out that this First Trust ETF is less than a year old and include the usual mantra of past performance is no indication for how it will perform in the future. But the remarkable performance is noteworthy for any large cap U.S equity fund, especially in the context of a long short fund where many underperform except in a down market,” according to a Seeking Alpha post.
The long-short strategy employed by FTLS has the potential to act as a hedge in down markets while tempering large drawdowns.
“Earnings quality is an assessment of the aggressiveness of accounting practices behind a company’s reported earnings. Research by Sabrient Systems and Gradient Analytics has shown that aggressive accounting practices (low quality earnings) are associated with lower future stock returns compared to those companies with more conservative accounting practices (higher quality earnings),” according to First Trust.
“The Sabrient/Gradient Earnings Quality Rank mentioned above is a proprietary forensic accounting process used to rate the quality or lack thereof for earnings. Aggressive accounting practices will garner low quality earnings power (prospective short positions) and conversely conservative accounting practices will be deemed higher quality and typically a higher stock prices (prospective long positions),” according to Seeking Alpha. [Consider These Alternative ETFs]
Top long positions in FTLS include Apple (NasdaqGS: AAPL), Reynolds American (NYSE: RAI), Altria (NYSE: MO) and Boeing (NYSE: BA). The ETF’s short positions include the SPDR S&P 500 ETF (NYSEArca: SPY) and Microsoft (NasdaqGS: MSFT).
FTLS charges 1.17% per year.
First Trust Long/Short Equity ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of Apple and SPY.