On any given day, exchange-traded fund investors can be found taking long and short positions looking for the best ways to capture returns.
The trouble with that approach, called a spread strategy, is that it usually involves buying multiple funds and incurring fees. The approach can become rapidly expensive, which is why Factor Advisors, a New York-based asset management firm, has developed the industry’s first family of spread ETFs, called FActorShares. The company says the funds give sophisticated investors a way to hold both bull and bear positions in one leveraged ETF.
Under five tickers, the initial funds pair up major asset classes from among the Standard & Poor’s 500 Index, U.S. Treasury Bonds, gold, oil and the U.S. dollar. They are designed to rebalance daily to achieve the effect of dollar neutrality. Also, the FactorShares ETFs have a four to one daily leverage ratio, so that each dollar invested provides two dollars each of short and long futures exposure.
The dual approach in one leveraged ETF also reduces leg risk, the possibility that prices on two specific trades will move unfavorably as a broker places two contingent orders in separate phases.
“To rebalance a portfolio, you want to take an investment that is 50you’re your money long and 50% short,” David Byrnes, a managing director at Factor Advisors said in a telephone interview. “The strategy is to build this into a simple, transparent ETF, where you can own the two indices in one specific position and product.”
Admittedly, Byrnes said, the strategy is not for independent advisors—or clients—who take a buy-and-hold, long-term approach to investing.
The company did, however, design the products that try to appeal to investors frustrated with expensive, inefficient spread strategies as they know it. The annual expense ratio is 75 basis points.
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