WisdomTree unveils innovative long/short and “bearish” equity ETFs on BATS

Jan 4th, 2016 | By | Category: Alternatives / Multi-Asset

WisdomTree, a leading provider of exchange-traded funds, has expanded their line-up of ETFs listed on the BATS Exchange with two innovative new hedge fund-style product launches: the WisdomTree Dynamic Long/Short US Equity Fund (DYLS) and the WisdomTree Dynamic Bearish US Equity Fund (DYB).

WisdomTree Launches Long/Short and Bearish US Equity ETFs on BATS Exchange

Jeremy Schwartz, WisdomTree Director of Research.

Comprising long and short sleeves, the WisdomTree Dynamic Long/Short US Equity Fund invests in a portfolio of roughly 100 US large- and mid-cap firms that exhibit strong growth (return on equity, return on assets, operating income growth) and value (dividend yield, price-to-operating cash flow, price-to-book ratio and price-to-sales ratio) characteristics. By harnessing these factors, this long portion of the fund aims to provide superior risk-adjusted returns compared to a broad equity market investing weighted by market capitalisation. The long portfolio seeks to maintain balanced growth, weighting its constituents by historical volatility and imposing sector and stock weight limits.

The fund simultaneously invests in a short portfolio of the largest 500 US firms weighted by market capitalisation to act as a broad market hedge during downturns. The short component is determined through a hedge indicator which examines whether growth and value characteristics are declining in the market. Depending on the strength of this indicator, the fund may employ a short portfolio equal to 0%, 50%, or 100% of the long portfolio.

The WisdomTree Dynamic Bearish US Equity Fund (DYB) constructs a similar long portfolio, also attempting to capture alpha through a stock selection strategy. The short portion of the fund is aimed at providing a “more bearish” net positioning compared to DYLS. It does this by employing a short portfolio equal to either 75% or 100% of the long equity portfolio. The long portfolio may also switch to US Treasuries dependent on signals in the market, thereby providing a more focused short equity exposure.

Jeremy Schwartz, WisdomTree Director of Research, commented: “WisdomTree’s strategies challenge the traditional long/short and hedge fund community with systematic, liquid long/short index-based ETFs. DYLS and DYB are designed to generate alpha at the core through quantitative and fundamental stock selection – while also having the ability to hedge market risk dynamically.”

The new launches appear significant in two regards. Firstly, the funds were likely brought to market in response to a growing demand for non-traditional alternative investment strategies, brought about by increasing correlation and volatility in asset markets. Secondly, the move signals a growing trend whereby hedge fund type strategies, once available only to high net worth individuals, are becoming increasingly accessible through rules-based investment vehicles such as ETFs. The ETF structure adds several key benefits over hedge funds including reduced minimum investment requirements, lower fees, no lock-up period, intra-day liquidity, transparent rules-based strategies, and the potential for a more favourable tax treatment.

Both funds carry total expense ratios of 0.48% due to a contractual waiver of certain fees in place until October 2016. At this point the expense ratios will rise to 0.53%.

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