Economic uncertainty and weak market conditions are fuelling a rising interest in long-short exchange-traded funds (ETFs). Buyers are looking towards long-short ETF funds to hedge their bets and gain the exposure they may not get in a traditionally structured portfolio.
After a number of companies announced worse-than-expected first-quarter earnings, investors are looking for viable alternatives to stocks. ETF funds, which leverage short-selling — borrowing shares of a stock in order to bet against it for profit — are thus proving to be a good way to rebalance portfolios.
Noah Hamman (pictured), founder and chief executive of AdvisorShares, has confirmed the rising demand for such products. Both of the long-short ETF funds he manages are seeing a lot of activity: the AdvisorShares Ranger Equity Bear ETF (HDGE) and the AdvisorShares Dorsey Wright Short ETF (DWSH).
HDGE, up 3.5% year to date, has holdings in Credit Acceptance, Align Technology, HSBC, AT&T and Hilton Grand Vacations, among others.
The main differentiator of long-short ETF funds is the “constant adjustments”. These are made to manage exposure and take advantage of market momentum, especially on more volatile days. Traditional funds gravitate towards companies that have increased earnings. However, these ETFs holdings favour companies with more fundamentally driven weakness to try to find the right opportunity to short.
AdvisorShares’ other alternative fund, DWSH, is up more than 6% year to date. It focuses on shorting the stocks of large-cap companies exhibiting low relative strength. Its top five holdings are Nu Skin Enterprises, Marathon Oil, Core Laboratories, Patterson-UTI Energy and Cimarex Energy.
The fundamental approach of long-short ETF funds seems to be outperforming the broader market. Combined in a portfolio, the selected companies present a smarter way to hedge some long positions and really diversify.