Exchange Traded Concepts, an exchange traded fund service facilitator, has launched a "forensic accounting" fund that selects stocks based on earnings quality.
On Thursday, the Forensic Accounting ETF (NYSEARCA:FLAG) began trading. John Del Vecchio, CFA, an Index principal and forensic accountant, is behind the Del Vecchio Earnings Quality Index, which was created for the new ETF. FLAG has a 0.85% expense ratio.
The new ETF will be passively managed, but it will follow the new growing class of rules-based or "intelligent" indexing strategies that mimic actively managed styles.
The Del Vecchio Earnings Quality Index assigns 500 large-cap stocks a grade of A through F based on Del Vecchio's "earnings quality" methodology. The index looks for aggressive revenue recognition, inventory issues, reserve concerns, large changes in operation expenses, large changes in operation income and tax issues. The index would then exclude F ranked stocks, instead of shorting them.
Additionally, stocks are weighted by earnings quality. Companies ranked the highest in earnings quality make up 40% of the index, whereas rank B, C, D earnings quality firms receive a 20% weighting.
Consequently, the portfolio will screen out companies with aggressive accounting practices and only hold firms with high quality earnings, according to the press release.
"FLAG seeks to track an index of stocks based on the science of forensic accounting. The proprietary accounting analysis at the individual stock level identifies financial weakness -- so called red flags -- and financial strength," J. Garrett Stevens, CEO of Exchange Traded Concepts, said in the press release. "We believe FLAG, which seeks to reduce the investment risk in equities, is a unique and timely ETF for investors."
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.