First Trust, the sixth-largest U.S. issuer of exchange traded funds, will introduce the First Trust Long/Short Equity ETF (NYSEArca: FTLS).
The new actively managed ETF 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.
“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 long-short strategy employed by FTLS has the potential to act as a hedge in down markets while tempering large drawdowns.
Quantitative and fundamental analysis is used to position the size and expected level of risk of the short portfolio, according to First Trust.
FTLS is the twelfth actively managed ETF introduced by Illinois-based First Trust and sixth this year. Successful actively managed offerings from the issuer include the First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP) and the First Trust Senior Loan ETF (NasdaqGM: FTSL).