New RAFI Long/Short ETF

ProShares is launching a new ETF which tracks an index created by Research Affiliates (disclosure: I work for an affiliate of Research Affiliates). Specifically, this is a long/short ETF which means that the main strategy will include holding long positions as well as short positions of various stocks. In this particular case, the ETF is seeking to capture the relative return difference between a Fundamental Index and a Market-Capitalization Weighted Index. (click here for more info)

The two indexes will hold many of the same names, but in different proportions. The Fundamental Index weights companies based on fundamental metrics, whereas the cap-weighted index weights companies on relative market capitalization. If the Fundamental Index has a higher weight of Stock XYZ than the cap-weighted index, it will be long Stock XYZ. If the Fundamental Index has a lower weight of Stock ABC than the cap-weighted index, it will be short Stock ABC.

Fundamental Indexing is gaining popularity. Russell is launching Fundamental Indexes and MSCI just launched Fundamental Indexes as well. Towers Watson, one of the largest pension consultants in the world recently recommended to their clients that up to 50% of their passive investment assets be switched from cap-weighting to fundamentals weighted mandates. I don’t know if the interest is to a level where the RAFI Long/Short ETF is going to pick up substantial assets right now, but I believe in time it is a worthwhile strategy that will attract assets.

Note that a RAFI long/short ETF in noisier markets would be more attractive as the return drag of a cap-weighted index is positively correlated with the pricing error in a market.

p.s. I’m not dead.

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 7 comments
  • Michael James

    I tried to ask Som Seif about this at a meeting a year or so ago, but he didn’t seem very interested. (I suspect he had bigger fish to fry at that moment.) It seems logical that strong believers in fundamental indexing would want to invest in the delta between fundamental and cap-weighted indexes. I’m not interested in upping my bet sizes, but others think differently.

    • Patrick

      For similar reasons, I would like to short this new ETF. :-)

      (With all due respect to our esteemed Mr Banerjee.)

      • Michael James

        @Patrick: I’d be interested in hearing your reasons for preferring cap-weighted indexes over fundamental weighting. I haven’t made up my mind yet.

  • jay

    A closed end fund is under this?

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