EQLS strategy
Simplify Market Neutral Equity Long/Short ETF (EQLS) is an actively managed fund with an expense ratio of 1.00% launched on 06/12/2023. The fund uses machine learning (a domain of artificial intelligence) to seek positive absolute return and income. As described in the prospectus by Simplify ETFs,
The Fund invests primarily in total return swaps that provide the returns, long or short, of a basket of common stocks. The companies in the swap basket are selected using a third-party, multi-factor quantitative ranking system based on machine learning. The ranking system seeks to identify the factors that are driving both positive and negative returns and classify securities based on forward-looking return expectations. The ranking system considers over 500 fundamental factors. The adviser selects securities based on analyses from the third-party research provider and aims to include the names of over 200 stocks with the best expected returns in the long basket and the names of over 200 stocks with lowest expected returns in the short basket. (…) The total return swaps provide the Fund equity exposure of approximately 200% long the stocks of companies exhibiting positive performance factors, and 200% short the stocks of companies exhibiting negative performance factors.”
In summary:
- EQLS is market neutral and leveraged by a factor 2.
- It holds swap contracts on common stocks. It means there is an additional counterparty risk compared to a plain vanilla equity ETF.
The EQLS portfolio
The fund is invested in global markets. The two charts below report net, long and short exposure in the top 10 countries and in GICS sectors.
Regarding geographical allocation, EQLS is net long in Sweden, and marginally in Australia. It is net short in the U.S., France, Switzerland, Germany. It is close to neutral in Japan, Canada, Italy and the U.K.
Regarding the sector breakdown, EQLS is net long in financials, energy, technology, materials and industrials. It is net short in all other sectors, mostly in healthcare and consumer staples.
The following companies are listed as the heaviest in the long basket*:
Rio Tinto PLC (RIO), NRG Energy Inc (NRG), Verisk Analytics Inc (VRSK), Manulife Financial Corp (MFC), Disco Corp (OTCPK:DSCSY), Nintendo Co Ltd (OTCPK:NTDOY), RELX PLC (RELX), Principal Financial Group Inc (PFG), Electronic Arts Inc (EA), Canadian Natural Resources Ltd (CNQ), Sun Life Financial Inc (SLF), Juniper Networks Inc (JNPR), Progressive Corp (PGR).
The following companies are the heaviest on the short side*:
Zebra Technologies Corp (ZBRA), Anheuser-Busch InBev SA/NV (BUD), TransDigm Group Inc (TDG), Danaher Corp (DHR), Teck Resources Ltd (TECK), Keurig Dr Pepper Inc (KDP), PepsiCo Inc (PEP), Alexandria Real Estate Eq. (ARE), Westpac Banking Corp (OTCPK:WEBNF), Extra Space Storage Inc (EXR), US Bancorp (USB), Edwards Lifesciences Corp (EW).
* with U.S. tickers for convenience.
Performance
As of writing, EQLS has less than 12 months of track record, which is too short to assess the strategy. Since 6/19/2023, it has lagged the treasury bill fund SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) by 4% in total return.
Competitors
The next table compares characteristics of EQLS and three market neutral equity ETFs.
- AGF U.S. Market Neutral Anti-Beta Fund (BTAL)
- First Trust Merger Arbitrage ETF (MARB)
- Leatherback Long/Short Alternative Yield ETF (LBAY).
EQLS |
BTAL |
MARB |
LBAY |
|
Inception |
6/13/2023 |
9/13/2011 |
2/4/2020 |
11/16/2020 |
Expense Ratio |
1.00% |
1.43% |
1.80% |
1.24% |
AUM |
$158.11M |
$221.37M |
$40.30M |
$44.20M |
Average Daily Dollar Volume |
$298.53K |
$5.72M |
$534.55K |
$111.05K |
EQLS is the second-largest fund of this group in asset under management, and it has the lowest fee. Its liquidity is weak. The next chart compares total returns since 06/19/2023. EQLS has lagged BTAL and LBAY, and it is almost on par with MARB. However, the latter is much less volatile, as expected for a merger arbitrage strategy.
Takeaway
Simplify Market Neutral Equity Long/Short ETF implements a leveraged global long-short stock strategy based on machine learning models (A.I.) EQLS is net long in financials and energy, and net short in healthcare and consumer staples. With less than a year of price history and a strategy lacking of transparency, it is impossible to assess the long-term potential of this fund. We can only notice that EQLS has underperformed a much safer T-bill ETF and two other market-neutral ETFs. Moreover, keep in mind that EQLS holds swap contracts embedding some counterparty risk.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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