ETF Spotlight: RAFI Long/Short ETF (RALS)

by on December 24, 2014

ETFs have been credited with democratizing the investing world, and bringing options to retail investors that were not previously available. This has been, perhaps, most prominent when it comes to alternative strategies that would otherwise be too complex or expensive to implement on one’s own. In an effort to shed light on some of the more unique products in the financial space, we take a dive into the RAFI Long/Short ETF (RALS) from ProShares.

Inside RALS’s Strategy

RALS utilizes a long/short strategy while tracking a RAFI (Research Affiliates Fundamental Indexation) Index. Components of a RAFI index (of which there are several) are decided by relative valuation factors like price/sales, price/cash flows, price/book and dividends. By focusing on these factors, attributes like market cap and volume, which dominated other indexes, do not carry as much weight for this fund. You can learn more about RAFI here.

RALS’s long/short strategy consists of taking long positions in components that have higher RAFI weights relative to their market cap weight and vice versa for short positions. The fund’s index is rebalanced monthly and new components are chosen annually. At the annual rebalance, the fund is also sector neutralized to ensure that no single segment of the market dominates the fund. RALS makes equal dollar investments in long and short positions and typically maintains a little less than 500 holdings [see also Does Your Portfolio Need A “RAFI ETF”?]. 

RALS tracks U.S. equities, putting a unique spin on some of the most popular securities in the world.

ChartsConsiderations on RALS’s Performance

As a long/short fund, RALS is not a product that looks to beat the market but rather provides returns for investors regardless of the environment. By shorting stocks that the RAFI method deems to be overvalued and taking long positions in stocks that appear undervalued by that same metric, RALS can theoretically see a positive return in any kind of market behavior.

RALS debuted in late 2010 and has seen something of a struggle to catch investors’ eyes. Its returns have been modest and the fund has gathered only $63 million in total assets, something that has kept it off the radar for many. As a young ETF, RALS has only known a bull market, but its appeal increases should markets head south. The long/short strategy has the potential to generate a positive return even if equities are dropping [see also Ten Commandments Of ETF Investing]. 

In short, the fund is simply as attractive during bull periods, but come a bear market, investor interest in this product will likely jump.

How to Use RALS in a Portfolio

RALS would likely never be a core building block in your portfolio. Instead, this product has appeal as a complementary holding to an already diversified strategy. It is especially attractive as a slight hedge against a market correction and may appeal to those who think markets are due for a downturn.

Investors who open a position in RALS should keep an eye on the fund’s monthly and annual rebalance to make sure that its strategy still aligns with their overall portfolio objectives. RALS charges 95 basis points for investment, which may seem high on the surface, but when you consider the cost of implementing its strategy on your own, RALS comes in at a relative bargain.

The Bottom Line

RALS is one of the most appealing alternative-strategy ETFs in the space with its long/short methodology. As always, be sure to take a look under the hood of the ETF to make sure you fully understand how it operates prior to making an investment.

Follow me on Twitter @JaredCummans.

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Disclosure: No positions at time of writing.