ETF Trends
ETF Trends

Investors seeking an alternative to traditional equity and fixed income strategies may consider looking into a specialized ETF strategy that capitalizes on “short squeezes” in the stock market.

The Active Alts Contrarian ETF (NasdaqGM: SQZZ) intends to generate capital appreciation via investing in domestic securities in addition to ADR’s traded on the US exchanges.

The ETF also hopes to generate income from securities lending. The ETF’s intent is to generate a significant yield from the interest earned on securities lending., which will be distributed quarterly.

The Active Alts Contrarian ETF has come up with over half a dozen winning stocks since its launch last spring including Sirius XM Holdings (SIRI),  Weight Watchers International (WTW), Lumber Liquidators Holdings (LL), Chegg Inc. (CHGG), Restoration Hardware (RH), GoPro, Inc. (GPRO) and GHC Holdings (GNC). GNC actually had a Zacks sell rating.

Brad Lamensdorf, founder of Active Alts Inc., manages the SQZZ ETF. As explained by Lamensdorf, components in SQZZ may be drastically shorted but must have solid fundamentals.  A short squeeze can occur due to various factors such as smart management moves, changes in market conditions or improved earnings.

A short position is a sale on a borrowed security.  The investor must eventually return the borrowed stock by repurchasing it on the open market.  If the price falls, the investor buys it back for less than the amount for which it was sold and pockets the difference.

A short squeeze occurs when investors with large short positions are forced to cover, or buy back, their shorts in the event of a sudden share appreciation- short sellers are essentially being squeezed out of their sort position, typically at a loss.

Related: The First Short Squeeze ETF Strategy Hits the Market

Consequently, the additional buying momentum from short sellers covering their shares helps to bolster the share price even further.

“Heavily shorted stocks already have a tremendous amount of negative news. As long as the fundamentals remain positive, the short seller will have to contend with positive catalysts on the horizon which could fuel potential buying,” Lamensdorf explained.

During the summer, three significant changes occurred in the SQZZ ETF.  First, the SQZZ management fee was lowered from 1.55% to 1.25%. Second, legal interpretations from the SEC on securities now allows the fund to lend up to 50% of the underlying securities for interest. Only 33% was previously permitted.  This change could allow for greater income generation. Third, the annual dividend payout has been changed from an annual payment to a quarterly payment.

For more information on alt strategies, visit our alternatives category.