First Trust is preparing to bring one of its largest actively managed US ETFs to Europe, with plans to launch a UCITS version of its $2.4bn First Trust Long/Short Equity ETF.
First Trust launched the US-listed First Trust Long/Short Equity ETF, known by its ticker FTLS, in 2014. Its growth to around $2.4bn in assets makes it one of the more established long/short ETFs in the US market. The strategy is not designed to be market neutral or to provide the inverse return of the stock market. Instead, it maintains an overall positive exposure to equities, with the short portfolio intended to provide an additional source of returns and potentially reduce some of the impact of falling markets.
The US fund recently had approximately 94% of its portfolio in long positions and 34% in short positions, giving it net equity exposure of around 60%. These figures can change as the manager adjusts the portfolio.
The approach differs from most active equity ETFs available in Europe, which remain long-only. Under the UCITS structure, negative exposure would generally be created using derivatives rather than by directly borrowing and selling shares. This introduces additional considerations, including financing costs, counterparty exposure and the expense of maintaining short positions.
Details including the ETF’s fee, ticker and proposed exchange listings have yet to be confirmed. The proposed launch was first reported by ETF Stream.
Our view
David Batchelor, senior analyst at QuotedData, said: “The arrival of a proven US long/short strategy would be another sign that Europe’s active ETF market is moving beyond relatively straightforward long-only portfolios. Giving a manager the ability to profit from both winners and losers can widen the opportunity set, while the strategy’s success in the US suggests that there is investor demand for this type of exposure. However, shorting is not automatically defensive and creates an additional way for the manager to be wrong. Investors will need to understand the fund’s changing net and gross exposure, the cost of its short positions and how much protection it can realistically be expected to provide during a market setback”.
