The Long And The Short Of It With This ETF

Long/short is a strategy many investors associate with being limited to hedge funds and other professional investors, but anyone can access that strategy with some exchange-traded funds, including the WisdomTree Dynamic Long/Short U.S. Equity Fund DYLS.

The WisdomTree Dynamic Long/Short U.S. Equity Fund, as its name implies, features both long and short equity positions. That new ETF's long positions are comprised of 100 large- and mid-cap companies that meet certain growth and value criteria. DYLS weights those according to their volatility traits. The new ETF's short equity positions “include the largest 500 U.S. companies, weighted by market capitalization, designed to act as a market risk hedge,” according to WisdomTree.

As stocks struggled to start the year, DYLS proved its mettle, trading flat. Even with its short exposure, DYLS is benefiting from the recent uptick in equities, sporting a year-to-date gain of 6.6 percent. That is about 270 basis points ahead of the S&P 500.

“DYLS treaded water through the first two months of the year, while the S&P 500 was off to one of its worst starts in history. The WisdomTree Fund was able to stay afloat because it maintained a market-neutral exposure for the first two months of the year. Put another way, its long portfolio of stocks was 100 percent hedged by being short the S&P 500. That hedge came off in March, and as a result, DYLS has since moved broadly with the U.S. equity market, as the S&P 500 recovered,” said WidsomTree Chief Investment Officer Luciano Siracusano in a recent note.

DYLS derives its long exposure from the WisdomTree Dynamic Long U.S. Equity Index, which is currently heavily allocated to technology and healthcare stocks. That benchmark is comprised of large- and mid-cap names.

The ETF's hedging mechanism becomes an advantage for investors as profits weaken or when broader market valuations become too frothy.

“But over longer holding periods, the performance DYLS posts compared to the S&P 500, on both an absolute and risk-adjusted basis, will be driven by how effective it is at hedging out market risk when market fundamentals deteriorate and stocks decline in the U.S. This means that if the hedging indicator signals 50 percent or 0 percent net equity exposure as the market rallies, the WisdomTree Index would experience less of that upside gain. Conversely, if the Index is 100 percent long when stock markets fall, it will likely experience losses with the broader market. So much of the efficacy of the strategy comes down to how well the hedging signal works,” added Siracusano.