130/30 ETF Targets Mispriced Stocks

May 15, 2019

Today newcomer Acquirers Funds launched its first ETF, which provides access to a 130/30 long/short strategy. The Acquirers Fund (ZIG) takes long positions in undervalued stocks with strong fundamentals, and short positions in overvalued stocks with weak fundamentals.

ZIG comes with an expense ratio of 0.94% and lists on the NYSE Arca.

Index

The fund’s underlying benchmark selects its components from the top 25% of U.S. stocks by size, and focuses on the Acquirer’s Multiple, a valuation metric developed by Tobias Carlisle, founder and director of Acquirers Funds. According to the firm’s website, the Acquirer’s Multiple is used to determine companies that are ripe for activist attention or acquisition.

Companies in the selection universe are evaluated based on statistical measures of fraud, earnings manipulation or financial distress.

Companies included in the long portion of the portfolio exhibit a significant discount to a conservative valuation, balance sheet strength and the ability to generate free cash flows. Companies included in the short portfolio exhibit a significant premium to an optimistic valuation, balance sheet weakness and a deteriorating business paired with a falling stock price, according to the prospectus.

The document notes that long positions will hold a weight of roughly 4% in the index, while the companies identified as undervalued will be shorted to roughly 1% of the underlying index. The prospectus also indicates that 30 long and 30 short positions held by the index will be rebalanced on a quarterly basis.

Strategy

Carlisle describes ZIG as a long/short deep value fund.

“The longs are focused on deeply undervalued companies struggling for some issue that’s resulted in the intrinsic value being a little impaired, and they’re trading at a discount to that intrinsic value. I’m trying to buy them before they see that mean reversion in the underlying business or the price discount,” he said, noting the short side of the index includes stocks for which it is hard to arrive at a valuation and where the stock price doesn’t really reflect the underlying weakness.

Carlisle says the research underlying the index has grown out of the books he has published, including “Quantitative Value,” published in 2012; “Deep Value,” published in 2014; and “The Acquirer’s Multiple,” published in 2017.

“I don’t think this should be your whole allocation to equities. If you want a concentrated investment in value, I think this is a very efficient way of doing that,“ he said of the fund, noting that now is an unusually good time for value, because spreads between the most overvalued and most undervalued stocks are at historical widths. That’s similar to what happened leading up to the dot-com bubble and the 1929 crash, which both preceded strong periods for value.

Contact Heather Bell at [email protected]

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