Acquirers Funds debuts with long-short deep value ETF

May 16th, 2019 | By | Category: Alternatives / Multi-Asset

Acquirers Funds, a new entrant to the ETF industry, has unveiled its debut product on NYSE Arca.

Tobias Carlisle, Founder of Acquirers Funds

Tobias Carlisle, Founder of Acquirers Funds.

The Acquirers Fund (ZIG US) provides access to a long-short, deep value strategy that consists of long positions in undervalued, fundamentally strong equities and short positions in overvalued, financially weak companies.

Tobias Carlisle, Founder of Acquirers Funds, commented, “I am very excited to be announcing the launch of ZIG. In 2019, after one of the most prolonged growth rallies ever, value spreads are widest since the run-up to the Great Depression and the Dot Com bubble.

“Historically, the base rate for investing in value after it has disappointed and spreads are wide has been extremely attractive. As a concentrated, long/short deep-value fund, ZIG is designed to maximally exploit this rare opportunity.”

The fund is linked to the Acquirer’s Index which selects its constituents from the universe of US-listed stocks in the top quarter of all companies by market cap (equivalent to a market cap greater than approximately $2 billion).

The methodology then ranks all constituents by their perceived value based on the ‘Acquirer’s Multiple’ – a valuation metric developed by Carlisle to identify stocks suitable for activist attention or acquisition. The prospectus defines the Acquirer’s Multiple as the firm’s enterprise value divided by operating earnings.

The index is composed of 30 long positions in the most undervalued stocks and 30 short positions in the most overvalued stocks, according to the Acquirer’s Multiple.

Before these constituents are added to the index, however, they are further evaluated in a bid to eliminate stocks whereby the Acquirer’s Multiple is distorted due to fraud, earnings manipulation, and financial distress.

Each potential long component is examined for a margin of safety in three areas: a wide discount to a conservative valuation; a strong, liquid balance sheet; and a robust business capable of generating free cash flows.

Similarly, each potential short component is examined to identify a large premium to an optimistic valuation, a weak, distressed balance sheet, and a deteriorating business and stock price.

“An important part of this process is a forensic-accounting diligence of the financial statements, particularly the notes and management’s discussion, and analysis, to find information that may impact investment decisions,” notes Carlisle. “We find most of our short positions revealed here. That type of thinking and research is what we’ve looked to build into ZIG, so investors of all types and sizes can now add the same approach to their portfolios via a liquid, low-cost ETF.”

Long and short positions are assigned weights of 4.3% and 1%, respectively, for a combined 130/30 long-short portfolio. Index rebalancing occurs quarterly.

The ETF comes with an expense ratio of 0.94% due to a contractual fee waiver in place until at least August 2020. Its gross expense ratio is 1.09%.

The fund’s expense ratio is certainly punchy considering the trend towards lower fees within the ETF industry; Morningstar recently reported that the asset-weighted average expense ratio of US open-end mutual funds and ETFs dropped by three basis points during 2018, from 0.51% to 0.48%. Investors can also achieve a form of long-only value exposure for as little as just 0.04% through the Vanguard Value ETF (VTV US).

However, Acquirers Funds notes that the ETF’s expense ratio is considerably below the Morningstar category average for alternative, long/short equity funds (i.e. including non ETFs), which is currently 2.17%.

The firm also maintains that the fund’s methodology, unlike most value factor ETFs, assists investors in avoiding value traps – investments that appear undervalued but turn out to be cheap because the company’s ability to make profits has been severely, and permanently, impaired in some way.

Carlisle explains, “There is no shortage of value factor ETFs available today, but value-as-a-factor and value-as-a-philosophy are two very different things.

“Any company with a seemingly depressed stock price can make it through many value screens, but truly undervalued stocks are much more than ‘cheap’; they also have strong, liquid balance sheets, and a robust business capable of generating free cash flows, and more.

“Looking at the fund landscape of the past several years, it’s no surprise that many investors may have been disappointed in their ‘value’ investments, but with ZIG, they now have the opportunity to augment that part of their respective portfolios with a true deep value approach that’s designed to uncover real opportunities, not just low-priced stocks.”

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