Monday, July 20, 2009

Is the new passive 130/30 ETF for you?

I'm reading the news in excitement. Finally a vehicle for the masses to easily tap into this long praised strategy.

ProShares Launches First 130/30 ETF

The ticker is: CSM - ProShares Credit Suisse 130/30


The idea is simple but it took a couple of PHD-s to perform proper research and produce an acceptable index to track with enough liquidity: Credit Suisse 130/30 Large-Cap Index

What is 130/30? From investopedia:
What Does 130-30 Strategy Mean?
A strategy that uses financial leverage by shorting poor performing stocks and purchasing shares that are expected to have high returns. A 130-30 ratio implies shorting stocks up to 30% of the portfolio value and then using the funds to take a long position in the stocks the investor feels will outperform the market. Often, investors will mimic an index such as the S&P 500 when choosing stocks for this strategy.

Investopedia explains 130-30 Strategy
To engage in a 130-30 strategy, an investment manager could rank the stocks used in the S&P 500 from best to worse on expected return, as signaled by past performance. From the best ranking stocks, the manager would invest 100% of the portfolio's value and short sell the bottom ranking stocks, up to 30% of the portfolio's value. The cash earned from the short sales would be reinvested into top-ranking stocks, allowing for greater diversification in the higher ranks.


Time will tell how successful this strategy is in relation to the rest of the market. I do recall high hopes for other "smart" strategy, which were less than brilliant as actual investment.

One should always remember the disastrous results of one certain quant fund which collapsed in 1997....

The new fund will rise and fall based on it's internal ranking system. Can quants (computer generated models) really predict well enough which stocks will go up and which down? Also note, the new ETF is expecting a 6% monthly turn over. If anyone was left holding the bag last year on Proshare's cap-gains distribution, you won't be rushing to ever own anything this ETF company produces again...

Cheers!

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