AdvisorShares recently made two separate filings with the SEC providing finalized and updated prospectus for two of its proposed actively-managed ETFs – the Active Bear ETF (NYSE:HDGE) and the Cambria Global Tactical ETF (NYSE:GTAA). Plans for both these funds had previously been indicated by preliminary prospectus being filed for each ETF. AdvisorShares provided important expense structure details for each fund that was previously undisclosed.
Active Bear ETF (HDGE)
The primary strategy that will be followed by the appropriately named HDGE, will be to short US traded equities in search of capital appreciation. The portfolio managers, Ranger Alternative Management, will target mid-cap to large-cap equities by utilizing a bottoms-up, fundamentals driven security selection process that will identify firms with poor earnings quality or aggressive accounting methods. The managers also try to anticipate negative earnings events such as downwards earnings revisions and negative forward outlooks. The short sale proceeds are generally invested in fixed-income securities of short maturity.
HDGE follows an investment strategy not seen in any other actively-managed ETF that could be used by investors to translate a bearish outlook on the market into a specific investment choice. The fund will target holding 20-50 short positions, with each position comprising 2% – 7% of the portfolio. The prospectus provides comparative performance on a composite called the “Range Short Only Portfolio” from Oct 2007 – Mar 2010, during which time, the Short Only portfolio returned 16.55% where the S&P500 returned -8.01%. The 1-year returns are more telling of how the strategy will behave in different markets. In the 1-year period, the S&P500 was up 49.77% while the Short Only portfolio was down -38.47%. That’s a massive difference in performance that indicates that HDGE’s fortunes will likely be very dependent on the general market direction, more so than on individual security selection. With correlations between individual stocks and the general market at an all time high, any moves in the market are very much seen in individual stocks too, regardless of fundamentals. As such, HDGE could be particularly susceptible to short squeezes that have been commonplace in the markets of the last 2 years.
The Active Bear ETF will charge investors a whopping 1.85% in total expenses, which beats any existing actively-managed ETF on the market right now. That expense ratio includes 1.50% in management fees, out of which 1.00% is passed on to the sub-advisors. Total gross expenses for the fund actually stand at 1.88% but AdvisorShares has provided a fee waiver of 0.03% to bring the net expenses down to 1.85%.
Cambria Global Tactical ETF (GTAA)
The Global Tactical ETF will invest across asset classes in US and foreign equity, fixed-income, commodities and currencies. The fund will primarily implement its investment views through investments in other ETFs, much like how the Dent Tactical ETF (NYSE:DENT) operates. The fund will be sub-advised by Cambria Investment Management, which is a relatively young investment manager that was formed in 2006 and had $24 million in assets as of Sep 1, 2010.
Essentially, GTAA will utilize a trend-following strategy that is based on a quantitative model to actively manage the portfolio and no effort will be made to forecast future market direction or conditions. Instead, the managers will look to capture these trends as and when they appear. Such a philosophy is the crux of many trend-following strategies because the managers do not believe they can forecast future markets accurately, so they instead focus efforts on spotting a change in trends and capitalizing on them. The performance of a Global Tactical Asset Allocation composite presented in the prospectus is impressive as the portfolio manages to avoid the strong volatility of 2008 and 2009 while delivering a steady return. Since inception in March 2007 till April 2010, the composite returned 4.39% while the S&P500 returned -2.95%. The strategy will likely underperform the market in strong positive trending periods, but will also be able to avoid the volatility of returns in strong down periods. Investors will be able to gain access to what could be best summarized as a trend-following global macro strategy.
The fund will charge investors a total expense ratio of 1.35%, including a base management fee of 0.90%. Both the fund manager, AdvisorShares and the fund sub-advisor, Cambria, have a tiered fee structure established that will depend on level of assets in the fund. The total expenses include “Acquired Fund Fees” of 0.30% to account for the expense ratios of all the underlying ETFs that the fund will invest in. AdvisorShares is providing a fee reduction of 0.16% to bring the expenses down from 1.51% to 1.35%.
Shishir Nigam is the founder of ActiveETFs | InFocus (http://www.etfshub.com/), which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.
Disclosure: No positions in above-mentioned names.
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