Making Money Alert
ETF Talk: When Times Get Tough, Hug a Bear
08/03/2011
Investors typically like to avoid stocks that are poised to go down, but I am bringing your attention today to an exchange-traded fund (ETF) that is designed to help you to profit from such situations. The Active Bear ETF (HDGE) offers a way to take a short position on a group of U.S. companies seen to be on the downswing. Such a situation actually may be taking place right now, in light of the recent market pullback.
The Active Bear ETF identifies corporations that have reported low quality earnings or engaged in aggressive accounting to mask deteriorating operations and to bolster reported earnings over a short time period. In addition, the fund’s portfolio management team seeks to identify earnings-driven events that may act as a catalyst to the price decline of a security. Such events could include downward earnings revisions or reduced forward guidance. Overall, the fund seeks to produce capital appreciation through short sales of domestically traded equity securities.
HDGE’s portfolio managers emphasize diversification, and they look for specific companies with a focus on events that hurt stock returns. The portfolio typically will consist of between 20-50 equity short positions, with an average position size of between 2% and 7% of the portfolio’s exposure. The fund’s managers use forensic accounting to dissect a company’s financial statements and to crunch numbers to ferret out indications of operational deterioration or manipulative sales and revenue recognition. The managers also have experience trading and managing short portfolios to allocate tactically to liquid, low short interest stocks of companies that may be masking weakening operations.
The fund’s two managers, John Del Vecchio and Brad Lamensdorf, have years of experience with short selling portfolios. Understandably, it requires special training to find stocks that have the potential to take a fall rather than the usual approach of buying the winners. As the following chart shows, HDGE has been notching strong results lately.
HDGE’s top 10 holdings, as of Aug. 2, are Industrial Select Sector SPDR (XLI), 3.63%; Best Buy Co. Inc. (BBY), 3.21%; NetApp Inc. (NTAP), 3.00%; Vulcan Materials (VMC), 2.85%; Rockwell Collins (COL), 2.74%; Spectrum Brands Holdings Inc. (SPB), 2.63%; Medidata Solutions (MDSO), 2.54%; Whirlpool Corp. (WHR), 2.48%; Paccar Inc. (PCAR), 2.47%; and Mohawk Industrials (MHK), 2.45%. Sector exposure for HDGE, according to the most recent data available on June 30, was 26% technology, 19% industrials, 12% financials, 12% consumer cyclical, 12% cash, 7% consumer defensive, 7% healthcare, 2% basic materials, 2% communication services.
As always, if you want my advice about buying and selling specific ETFs, including appropriate stop losses, consider subscribing to my ETF Trader service. I am happy to answer your questions, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.