Virtus ETF Solutions has launched the Virtus Enhanced Short US Equity ETF (NYSE: VESH), a rules-based fund providing short exposure to large- and mid-cap US equities. VESH may appeal to investors who have a bearish view of the US market or those who wish to tactically hedge the US equity exposure in their portfolios. The ETF is managed by Rampart Investment Management, a Virtus affiliate.

The Virtus Enhanced Short US Equity ETF seeks to outperform the inverse return on the S&P 500 Index.

VESH seeks to outperform the negative total return of the S&P 500 Index by providing inverse exposure to large- and mid-capitalization US equities.

It systematically shorts listed futures contracts based on the S&P 500 and its sectors according to a proprietary, relative strength momentum methodology that overweights short exposure to sectors that have exhibited the weakest relative strength. As such, VESH marries a classic enhanced beta technique with short selling.

At each month-end, VESH’s portfolio will be adjusted such that 50% of the fund is exposed to short futures contracts linked to the S&P 500 Index. At the same time, the trailing 9-month performance of each GICS sector index will be calculated. The five sectors with the worst trailing 9-month performance will be identified and the futures contracts of these five weakest sectors will also be sold. The weighting of these short sector futures will equal each sector’s weighting in the S&P 500 Index, and the total weight of these short sector futures will equal 50% of the total fund net asset value.

Due to the compounding of daily returns, returns on traditional inverse or leveraged ETFs over periods other than one day may differ in amount and possibly direction from the target return for the same period. These effects tend to be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. As such, these ETFs may only suit sophisticated investors looking for short term tactical exposures.

Virtus notes that with VESH however, the fund does not need to conduct daily rebalancing and, in the process, mitigates swaps-based risks.

“VESH is structurally different than other ‘inverse’ ETFs because it does not utilize swaps, does not feature a leveraged investment objective, and does not rebalance on a daily basis,” said William J. Smalley, executive managing director and head of product strategy and management, Virtus ETF Solutions. “We believe it addresses the structural issues associated with daily-rebalanced, inverse ETFs.”

“VESH demonstrates our commitment to deliver innovative ETF solutions that seek to mitigate risk management challenges in investor portfolios,” Smalley added.

The fund has a total expense ratio of 0.55%.