The Growth of the Short-Selling Hedge Fund ETF (HDGE, GT, OPEN, ENR, COL, GMCR, C, ERIC, ATI, BBY, JCI)April 12, 2012 by Jon C. Ogg
The short-only equity ETF saw inflows as well this week as the market was soft earlier in the week, but that will obviously ebb and flow as the markets rise and fall. The top ten short positions are as follows (largest first): Goodyear Tire & Rubber Co. (NYSE: GT); OpenTable, Inc. (NASDAQ: OPEN); Energizer Holdings Inc. (NYSE: ENR); Rockwell Collins Inc. (NYSE: COL); Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR); Citigroup, Inc. (NYSE: C); Ericsson (NASDAQ: ERIC); Allegheny Technologies Inc. (NYSE: ATI); Best Buy Co. Inc. (NYSE: BBY); and Johnson Controls Inc. (NYSE: JCI). Without rounding up or down, these top ten short positions account for only 32% to 33% of the entire ETF’s short positions.
Here is the ETF’s philosophy in a nutshell: “The portfolio management team implements a bottom-up, fundamental, research driven security selection process. In selecting short positions, the Fund seeks to identify securities with low earnings quality or aggressive accounting which may be intended on the part of company management to mask operational deterioration and bolster the reported earnings per share over a short time period. In addition, the portfolio management team seeks to identify earnings driven events that may act as a catalyst to the price decline of a security, such as downwards earnings revisions or reduced forward guidance.”
One thing is nearly certain here. If investors are looking for an ETF product that bets against high valuations or against what may be market aberrations, they may have found their vehicle.
Now, here is the flip-side of this ETF. There are two sides to every coin. If you get into a serious bull situation this can lose incredible amounts of money. Sometimes it is the most troubled stocks which rally the most, and it doesn’t take a rocket scientist to figure out what likely happens to the price of this ETF in that situation.
The ETF’s Net Expense Ratio is currently 3.29% but the fund noted “The Advisor has contractually agreed to keep the Fund’s Total Annual Fund Operating Expenses from exceeding 1.85% for at least a year from the date of the Prospectus. This agreement is limited to the Fund’s direct operating expenses and, therefore, does not apply to “Acquired Fund Fees and Expenses.” The fee breakdown is as follows per the ETF fact sheet:
- Management Fee 1.50%
- Short Interest Expense 1.44%
- Other Expenses 0.22%
- Acquired Fund Fees 0.13%
- Gross Expense Ratio 3.29%
JON C. OGG