Investors who are wary of dubious accounting practices that may inflate a company’s worth can turn to a targeted exchange traded fund that implement forensic accounting practices to separate the wheat from the chaff.
The WeatherStorm Forensic Accounting Long-Short ETF (NasdaqGM: FLAG) tries to reflect the performance of the WeatherStorm Forensic Accounting Long-Short index, which seeks enhanced U.S. large-cap exposure through a long/short portfolio of 500 largest U.S. companies, along with the systematic selection and shorting of stocks based on forensic accounting analysis.
Forensic accounting dissects companies’ financial statements to identify so-called red flags of aggressive accounting and revenue recognition practices. The index will identify higher quality stocks with more sustainable revenues, cash flows and earnings while at attractive valuations.
“Red flags often indicate underlying business problems and will usually end up reflected in the price of a company’s stock,” according to WeatherStorm.
On the other hand, the index will short lower quality stocks where aggressive accounting practices may have been employed and revenues, cash flows and earnings may be less persistent in the future.
The underlying index will combine six forensic accounting and valuation factors for scoring and ranking, including cash flow quality, revenue recognition, earnings quality, shareholder yield, earnings surprise, and valuation.
Related: A Familiar Gold Catalyst is Still in Play
The index will take a 130% long and 30% short position with a net 100% equity exposure.
“The index construction process aims to identify and allocate capital to higher quality stocks at attractive valuations while avoiding or shorting lower quality stocks with less attractive valuations,” according to WeatherStorm.
Sector weights include consumer discretionary 14.5%, consumer staples 10.1%, energy 6.5%, financial 14.1%, health care 11.0%, industrials 8.1%, information technology 20.5%, materials 5.2%, real estate 2.0%, telecom 2.9% and utilities 5.2%. Top long positions include CoreCivic 1.1%, Centene 1.1% and T Rowe Price 1.1% while top short positions include Nektar Therapeutics 0.8%, Juno Therapeutics 0.8% and Cintas 0.8%.
For more information on the ETF industry, visit our current affairs category.