Long and the Short: ETFs for an Undecided Market

ETFs that hedge are likely to gain in popularity this year.

Reviewed by: etf.com Staff
Edited by: Ron Day

When investors hear the term “portfolio hedging,” their reactions may range from “why bother, the market goes up over time,” to “that’s too complicated, and hedge fund managers have had mixed results and mixed reputations over the years.” 

I’m dismissing both of those responses to highlight an emerging segment of the ETF arsenal. It's one I used as an investment advisor for years until I ultimately pivoted to being the “hedged” manager for clients. 

Way back then, I used mutual funds to design the hedged portfolios, assembling a group of funds with styles including long-short, which typically implies that the manager, in this case an ETF manager, is taking a position that is either leaning toward the “long” side of the market (if stocks go up, they expect to benefit) or the “short” side (if the market falls, they tend to do better).  

Advisors have an increasing number of choices in this area, and I suspect more are coming as active ETFs inflows continue their rapid pace. Here are a few examples that advisors can use to start to research how they can essentially create their own “hedge fund of funds,” but with two key advantages over hedge funds. 

Hedge Fund of Funds

First, the cost to the client is bound to be lower, and second, the advisor is in the allocator’s seat, and can make changes to the manager-of-managers portfolio as easily as selling an ETF to raise cash for a client that needs that cash in two days (trade settlement period).  

The clear fund flow leader among long-short ETFs in 2024 has been the First Trust Long/Short Equity ETF (FTLS). It has added $230 million this year. That, and its 18.2% trailing 12-month return have pushed its assets under management to over $1 billion. That’s more than double what the ETF manager had to work with just two years ago.  

This is a sign that the long-short approach is gaining some traction among ETF investors and advisors. However, when we consider the buying frenzy the past few years over covered call ETFs like the $33 billion JPMorgan Equity Premium Income ETF (JEPI), which some would consider a competing ETF style to long-short, that indicates that long-short may just be starting to find its groove.

The Simplify Market Neutral Equity Long/Short ETF (EQLS) is a much smaller fund at $162 million in assets, and represents what was a very sought after investment style back in the day, via mutual funds. Market neutral funds go long and short but tend to gravitate toward equal exposure to each side of the coin. That essentially negates most market impacts and puts the onus of performance generation directly on the specific holdings of the ETF. It also is expected to keep volatility very low, often bond-like. So as with long-short, market neutral ETFs offer advisors a way to be invested, but always hedged in some fashion.

Both FTLS and EQLS are up more than 6% to start this year, and as of Tuesday’s close, both were outpacing the S&P 500 with less volatility. That is not a large enough “sample size” to draw any firm conclusions, but the long-term ability of long-short funds in various forms, in a daily-liquid ETF wrapper instead of a hedge fund, might just be a door-opener for advisors to high net worth prospects.  

As markets continue to find their way at this stage of the market cycle, etf.com’s ETF Screener shows 17 ETFs classified as long-short, and there are likely others which resemble that approach. For advisors looking to differentiate, this could be one of the best new research angles they’ve had in a long time.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.