Big Gains And Limited Risk: BTAH Offers A Way

by on February 23, 2012 | ETFs Mentioned:

This year is off to a hot start for U.S. equity markets as encouraging economic data has helped to restore confidence in the domestic recovery, paving the way higher for stocks as investors increase their risk appetite. The bull-run on Wall Street has undoubtedly caught investors’ eyes, and many are looking for a way to tap into the action. Despite the optimistic outlook for the economy, many investors are still faced with a critical challenge: market timing. Buying in at the wrong time, even during a bull market, can end up costing more than you bargained for [see also Greedy When Others Are Fearful ETFdb Portfolio]. Luckily, newcomer QuantShares offers a toolbox of “market neutral” ETFs, allowing for tactical exposure while easing the burden on investors to try and time the market. 

Although market neutral investing is nothing new in the world of finance, the evolution of the exchange-traded product structure has brought forth this previously difficult to implement strategy to mainstream investors. Market neutral strategies are often times associated with paltry returns thanks to their conservative, defensive-minded reputations, however, BTAH has proven this stereotype wrong. The U.S. Market Neutral Beta Fund (BTAH) offers investors a “safer” approach to profiting from bullish euphoria in the markets as opposed to simply holding onto a long position in equities [see Fund Managers Turn Bullish As "Risk Appetite" Increases].

BTAH Has Done Its JobFile:Charging Bull statue.jpg

This ETF, which has amassed nearly $6 million in assets since launching in September of 2011, tracks an equal weighted, dollar and sector neutral index. The underlying index is re-balanced monthly and is comprised of long positions in the highest beta U.S. stocks along with short positions in the lowest beta stocks. The result: an easier way to make a bullish bet without the excessive risk of long-only exposure [see BTAH Fact Sheet]. 

BTAH offers a source of uncorrelated returns to broad equity markets seeing as how it maintains equal long and short dollar positions. More specifically, BTAH is designed to capture the spread return between high beta and low beta stocks. Given this objective, BTAH can be expected to generate positive returns when “riskier” stocks lead the way, which is common in bull markets.

Keep in mind that the underlying portfolio is also sector neutral; this ensures that the fund won’t simply long traditionally higher risk corners of the markets, like technology, and short historically defensive sectors, such as consumer staples. Instead, this ETF offers balanced long/short exposure that can generate profits as long as investors’ risk appetite keeps pushing the higher beta securities higher. Performance results speak for themselves, and judging by the numbers, BTAH has most certainly done its job well in 2012 [see also QuantShares January 2012 Performance Report]. This ETF has gained an impressive 12.75% year-to-date, versus broad U.S. markets, as represented by SPY, which are up only 8.74% (as of 2/21/2012).

Thanks to its creative long/short approach, BTAH can be a useful tool for investors looking to bet on strong performances from U.S. stocks, but are unwilling to take on the significant downside risk that comes with a traditional long-only strategy [see all the ETFs in the Long-Short ETFdb Category]. BTAH can be expected to perform well during bull markets as investors increase their risk appetite; this effectively ensures that the winning long positions in the higher beta stocks will more than make up for the losing short positions in the lower beta securities. 

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Disclosure: Photo courtesy of David Prior. No positions at time of writing.