In a major new development for the exchange-traded fund [ETF] industry, ProShares has filed papers with the Securities and Exchange Commission [SEC] for a new "130/30" ETF.
The new fund will use a proprietary, quantitative analytical system to rank all of the large-cap stocks in the U.S. market. It will then take a 130% long position in the high-ranked stocks and a 30% short position in the low-ranked stocks. The goal is to capture additional alpha and generate excess returns while retaining a net 100% exposure to the market.
This kind of "130/30" strategy is one of the fastest-growing segments of the financial industry. According to Morgan Stanley, there is now more than $100 billion invested in 130/30 funds worldwide. Most of that money is run by hedge funds and other high-cost products targeted at institutions and ultra-high-net-worth investors, and nearly all of it by active managers. The new ProShares fund, in contrast, will make the strategy available to all investors at a relatively low cost using an index-based approach.
S&P 130/30 Index?
It's not immediately clear if the new fund is tied to the recently launched S&P 500 130/30 Index. The prospectus leaves the index name blank, and neither ProShares nor S&P would comment.
S&P launched its index in November of this year. Looking at the details, the index appears to take a different approach to the market, pairing a 100% long position in the S&P 500 with a 30%/30% alpha-seeking basket. That basket takes thirty 1% long positions in stocks ranked 5-STARS by S&P's analyst team and thirty 1% short positions in stocks ranked 1-STAR.
Even if the ProShares fund is using a different index, however, the coincident timing of the two launches shows that the index/ETF industry is looking very, very closely at this market.
Details on the ProShares Fund
The prospectus for the ProShares funds leaves much to the imagination. There's no word yet on expenses, or much in the way of details on the underlying quantitative strategy.
Still, there are a few things we can suss out. For starters, ProShares has left itself a lot of discretion in how it will track the index, including sampling the underlying stocks or using futures, swaps or options to gain similar exposure.
Why This Is Important
The fund represents an important break from ProShares. To date, ProShares has only launched ETFs inside its family of leveraged, short and short-leveraged funds. This 130/30 product moves into an entirely new area of sophisticated strategy funds designed to generate alpha against the market. Many think this is the next big generation the industry is heading into, and this filing could be an important first step.
The fund is also another nail in the coffin for the idea that ETFs only track passive indexes. While this fund may follow an index, it's about as far from a passive, beta-1 exposure as you can get. The ETF industry has moved past going active; it's going hedge fund. And soon we will get to see if it delivers results.
Written by Matthew Hougan.