Investing in Funds: A Monthly Analysis; Open & Shut: Hedging Bets; ETF industry joins the mutual-fund world in employing a trendy hedge-fund technique
Call it alphabet-and-numbers soup: The exchange-traded-fund industry is about to launch a "130/30" ETF.</br></br>The product, from ProShare Advisors LLC of Bethesda, Md., represents a move by the ETF industry into an increasingly popular category of funds that bet on share-price declines as well as gains in a bid to juice returns. These so-called 130/30 funds have been proliferating in the mutual-fund industry as small investors clamor for investment vehicles that resemble hedge funds, those largely unregulated investment pools for wealthy individuals and institutions.</br></br>Some financial pros say ETFs, which are akin to index-based mutual funds but trade on exchanges like stocks, may offer one of the cheapest ways for small investors to get access to generally pricey hedge-fund tactics, which aim to create positive returns with low volatility regardless of what the stock market is doing. The reason: ETFs are tax efficient and usually have lower expense ratios than conventional mutual funds because they are based on indexes, not actively managed by salaried stock pickers. "The 130/30 is the fastest growing, hot new thing in the market," says Matt Hougan, editor of IndexUniverse.com, a Web site dedicated to index-based investing. "This fund, by packaging that strategy into a passive product and charging what I expect to be a relatively low expense ratio and making it available to advisers and retail investors, is pushing the ETF industry to the next level."</br></br>In simplest terms, a 130/30 fund invests $100 in stocks expected to increase in value. It borrows and sells $30 worth of shares expected to fall in price, with the aim of replacing those borrowed shares with stock bought later at a lower price. The proceeds from that so-called short sale are used to buy stocks thought to be undervalued, so the fund ends up investing $130 in stocks expected to rise in price and $30 in shares expected to fall.</br></br>The goal of ProShare Advisors' planned 130/30 ProShares ETF is to mimic the performance of a 130/30 index, before fees and expenses. The fund's prospectus doesn't name the index the fund will track, give details on expected expenses or say when the fund will be available to investors, and the company declined to elaborate. The fund will use a mathematical approach to determine the quantity and mix of positions to hold to approximate the performance of its benchmark, the prospectus says. Credit Suisse Group, meanwhile, said at a panel discussion last week that it and an ETF provider plan to launch a 130/30 ETF this spring based on an index it created. Credit Suisse declined to name the provider.