Long Story Short: This First Trust ETF Has a Lot to Like

A number of exchange-traded funds now allow investors who are more than 100% convinced of their view to exercise their opinion, as ETF marketers like to say. Almost all these funds cover broad market indexes or high-level sectors. Back when mutual funds ruled the roost, there was a number of what used to be known as 120/20 or 130/30 strategies where managers would pick a basket of stocks to short and then use those proceeds to purchase names they liked. The 120 referring to 20% leverage and 130 indicating 30% leverage. What is different about this strategy is that instead of using leverage to enhance your strategy in one direction, long-short funds look to make gains on the shorted stocks as well as additional profit from the levered positions. Given the markets since the end of 2020, I was interested to check in on a fund that was launched in 2014 by issuer First Trust, the First Trust Long/Short Equity ETF . As you can imagine, this fund is actively managed and has a base management fee of 95-basis points as well as additional fees from what the issuer describes as margin interest and short sale fees for a total expense ratio of 136-basis points, meaning that a shareholder with $1,000 invested over a calendar year would expect to pay $13.60 in fees over the period. Fast Math on FTLS Between Dec. 31, 2020 and Tuesday of this week, the SPDR S&P 500 ETF Trust has returned 11.50% on an annualized basis and FTLS has performed a full percentage point better at 12.50%. I was interested to see how the fund achieved this, but with an active portfolio, estimating sources of returns over that long a period would require math way beyond my capabilities. What I was able to do was run some attribution on the shorter, year-to-date period to Tuesday. From the end of last year to Tuesday, FTLS has returned -3.70% as compared to the SPDR S&P 500 ETF Trust's -10.27% as shown in the chart below. The attribution model I built tells me that my calculated share price is approximately 7% off from closing share price at Dec. 31 of last year, so while I know it's not perfect, I am comfortable using these calculated position weights as the starting point for my analysis. Before we get to contributors to and detractors from year-to-date fund returns I wanted to mention that while I was reviewing the fund's 370 holdings (including cash) I noticed that the fund is long approximately 2.60% in other ETFs, specifically iShares Russell Value ETF , iShares S&P 500 Value ETF , Schwab US Large Cap Value ETF , SPDR Portfolio S&P 500 Value ETF and the Vanguard Mega Cap Value ETF with all positions at 0.52% as of March 11 (per the holdings file downloaded from the issuer website). Not huge positions -- but a clear indication as to where the portfolio managers' thinking lies. Other positions that caught my eye were the short positions in the March expiration E-Mini Russell 2000 and E-Mini Nasdaq 100 futures contracts with weights of -5.48% and -6.96%, respectively as of March 11. In terms of top contributors to return only four of the Top 10 contributors to return were long positions and by my math include CF Industries , Abbvie , Vertex Pharmaceuticals and Occidental Petroleum . Of the short positions, top contributors included Fastly , Wayfair and Microstrategy Inc . In case you're wondering, the Nasdaq and Russell futures ended up ranking 37th and 176th, respectively, in term of contributors to return. Top 10 detractors from returns were all long positions and included names like Amazon , Microsoft , Meta Platforms , Apple and T. Rowe Price Group . It is some extra work to calculate attribution, but simply referencing a stock's returns and assuming that a stock with a better/worse return impacted a fund similarly discounts the effect of a positions weight in the portfolio. For example, in my analysis, AAPL was down 12.54% in the period and FB was down 42.91%, yet AAPL had a larger impact on the portfolio due its position size. The Long and Short of It As the ETF industry begins to see traditional active mutual fund issuers enter the market, there will be an explosion of essentially cloned funds starting to hit the market. We have already started to see this with the launch of the Fidelity Magellan ETF and others. While these legacy companies attempt to get up to speed with ETFs and preserve market share, funds like FTLS will have the luxury of being able to stick to their knitting and continue to generate returns for their shareholders. At 6.57% over SPY so far this quarter, what's not to like? (Apple, Amazon, AbbVie and Microsoft are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

Long Story Short: This First Trust ETF Has a Lot to Like

Let's take a deep dive into the First Trust Long/Short Equity exchange-traded fund, which looks to make gains on shorted stocks as well as additional profit from levered positions.

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