While the American market continues to chug along, many are becoming more pessimistic regarding international markets. Growth levels are slowing in a number of key countries, and a strong dollar isn’t helping matters either, dulling the appeal of foreign securities.
Thanks to this trend, some investors are looking to reduce their foreign holdings, or even go short in these rocky markets. One new way to do this in ETF form is by taking a closer look at the brand new Athena International Bear ETF (NYSEARCA:HDGI) from AdvisorShares.
HDGI in Focus
This new ETF looks to generate capital appreciation through short sales of international equities. Currently, the product holds about 50 securities short in its portfolio, putting no more than 10% of the short position into any single security (also read Time for Inverse Bond ETFs?).
Stocks are selected for the portfolio thanks to behavioral research, using AthenaInvest Advisors’ patented system. This research measures manager behavior, strategy consistency and conviction, and it also evaluates which stocks are held in top and bottom relative weight positions within the equity universe.
Additionally, the portfolio manager will also utilize equity manager and investor behavior factors in order to determine the most attractive markets and capitalization ranges for their short choices. Once this is done, the stocks that rank the lowest from the conviction holdings list receive allocations in the fund, based on market cap.
This process is obviously more intensive than what many other corners of the ETF world use in their fund construction process, so higher expenses should be expected here. Currently, management fees come in at 1.35%, while short interest expense (0.5%) and other expenses (.26%) push the gross expense ratio up to 2.11%. However, there is a fee waiver of 11 basis points while the advisor has promised to keep net expenses from exceeding 1.5% for at least a year from the date of the prospectus (if not longer).
How does it fit in a portfolio?
Investors looking to short international markets may find this ETF to be a compelling choice, as it looks to have decent underlying liquidity thanks to its focus on ADRs and other securities on US exchanges. Plus, the use of active management—and especially the ‘tactical overlay’—could help to select better stocks for short candidates (also read How to Short Silver with ETFs).
However, investors should note that this product is a bit pricier than its competitors, and even many inverse ETFs. Bid ask spreads may also be elevated, at least for the time being, as the fund builds up AUM and interest.
(HDGE) is the very popular domestic counterpart for this ETF, focusing on shorting securities that have low earnings quality, or are utilizing aggressive accounting practices. The product has over $200 million in assets under management despite its relatively lofty 3.3% net expense ratio.
This fund isn’t really that appropriate of a competitor though, as it has a very different focus and methodology, though it does show that there is clearly some interest in the shorting individual stocks technique.
There are, however, a plethora of options in the inverse market that can provide short exposure to foreign securities. In particular, HDGI could see some competition from (EFZ) which follows a short MSCI EAFE Index or the more specialized (EUM) which offers short exposure to emerging markets.
Both of these ETFs charge investors 95 basis points a year in fees, and reset on a daily basis. Additionally, both members of the duo have more than $100 million in assets, suggesting that they are relatively popular with investors (see 5 Most Popular ETFs of the Second Quarter).
Given this, it may be somewhat difficult for HDGI to build up assets, at least initially thanks to its elevated expense ratio. However, if the domestic HDGE is any guide, there is clearly some interest in the approach, and with struggling international markets, HDGI could begin to make a name for itself in time as well.
This article is brought to you courtesy of Eric Dutram.