For many investors, generating alpha is perhaps one of the most important results any long-term portfolio should deliver. Most would agree that simply placing one’s assets in a broad market index, such as the S&P 500, is not the most efficient means of achieving excess returns. Instead, investors turn to alternative strategies to exploit profit opportunities from the market. And thanks to the ever-evolving world of ETFs, there are now hundreds of products that seek to generate the highly coveted alpha [see also How To Pick The Right ETF Every Time].
A number of these new products are actually twists on the most popular members of the first generation of ETFs, altering the weighting methodology or selection criteria underlying well-known stock and bond benchmarks. One of the most interesting twists in the world of S&P 500 ETFs came in 2009 with the introduction of ProShares’ Credit Suisse 130/30 ETF (CSM), the first ETF to offer the popular 130/30 investing strategy. Although this concept is nothing new in the financial world, its easy availability to all walks of investors has made CSM one of the most popular funds among S&P investors.
Inside 130/30 Investing
The concept behind the 130/30 strategy is relatively simple; from a group of securities, a manager or quant-based methodology is used to identify a selection of components deemed to have the greatest potential for appreciations and those with the least potential. Furthermore, the strategy involves using limited shorting and leverage in an attempt to take advantage of both positive and negative movements in stock prices. The goal is to short index components expected to generate negative alpha, and use the proceeds to establish overweight positions in those that will generate positive alpha.
If this objective is accomplished, a 130/30 fund will likely outperform the long-only related benchmark, while still maintaining an overall risk profile that is very similar to the index from which the securities are selected. But if the best performers are shorted and the proceeds used to double down on laggards, the strategy could underperform [see also Cheapskate Hedge Fund ETFdb Portfolio].
CSM Delivering Alpha?
With its inception in July of 2009, CSM’s track record is somewhat limited. Despite its short history, the fund has been able to deliver a stellar performance, giving investors greater returns than the S&P 500. CSM holders currently enjoy a 44.2% 3-year and 14.4% year-to-date return. In comparison, the S&P 500 Index, as tracked by SPY, has delivered a three-year return that is 46 basis points lower and a year-to-date return of just 13%:
Taking a closer look at the fund’s portfolio, CSM currently has a heavy long position in consumer (non-cyclical), financial and technology sectors; conversely, utilities, communications and energy stocks receive the highest weightings in short positions. Top long holdings include Apple, Exxon Mobil and Microsoft, while top short positions are in Fossil, NRG Energy and Hudson City Bancorp stock.
Follow me on Twitter @DPylypczak
Disclosure: No positions at time of writing.