A Forensic ETF

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John Del Vecchio, a forensic researcher with previous stints at CFRA and Behind the Numbers, will be launching a new ETF based on forensic research: The Forensic Accounting ETF (NYSEArca:FLAG).  Creating investable product from research is one way for research providers to monetize their intellectual capital.

The new FLAG ETF will be tied to an earnings quality index created by Del Vecchio.  The index ranks 500 large cap stocks on an ‘A’ through ‘F’ scale based on earnings quality.  The index uses a financial model which looks for overstated revenue, underestimated expenses, generated unsustainable sources of cash flow, among other key measures that could indicate low earnings quality.

The index excludes stocks that receive the lowest ‘F’ rating.  Stocks that receive an ‘A’ represent 40% of assets, while those that have ratings of ‘B’, ‘C’ or ‘D’ each get 20%.

Securities within each grade level are equal weighted.  Grades are computed on a monthly basis and the index will be reconstituted on a semiannual basis.  No short exposure will be used in the fund, instead focusing in on stocks with higher earnings quality in order to achieve alpha.

We highlighted Del Vecchio last year when he launched a short-oriented ETF (HDGE).   HDGE has amassed over $300 million in AUM and averages over 500,000 shares a day in volume, making it one of the most popular actively managed ETFs.  With an expense ratio of 1.85%, the product is netting over $5.5 million in management fees each year.

The new forensic ETF will be passively managed, so will likely have much lower management fees than HDGE.  Nevertheless, it is simpler to manage, being based on an index derived from an earnings quality model.  Even better, there are currently no other forensic-oriented ETFs.

It is not easy to create investable product from research.  Riedel Research worked with Van Kampen to create an emerging markets unit trust which attracted around $350 million in assets.  ETFs generally require an index (unless actively managed), which can take years to develop a track record.  Nevertheless, by acting as a subadvisor or as a licensor, research firms avoid many of the burdens of asset management, while creating profitable future annuities.

 

 

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