Exchange Traded Concepts, in conjunction with Index Deletion Strategies, has filed a registration statement and preliminary prospectus with the Securities and Exchange Commission to issue the Forensic Accounting ETF (FLAG).
FLAG will represent the first long-only exchange-traded fund strategy based on an index derived from forensic accounting principles that red flags problems in a company’s financial statements, enabling FLAG to exclude such companies from its portfolio.
John Del Vecchio, an Index principal and forensic accountant, is currently portfolio manager of the Active Bear ETF (HDGE), the largest actively managed equity ETF with USD330m in assets and the only actively managed short ETF. He plans to use his more than a decade of experience as a portfolio manager using forensic accounting to short stocks in establishing FLAG as an alternative to traditional index funds.
FLAG will track the Del Vecchio Earnings Quality Index, which assigns 500 large capitalisation stocks A through F scores based on Del Vecchio’s "earnings quality" method. The index excludes F ranked stocks rather than shorting them, allowing investors to attain the alpha of the index without taking short positions. Constituents stocks are weighted by earnings quality rather than market capitalisation.
“John’s choice to work with us reinforces the value of leveraging our counsel and operational expertise to introduce new concepts to the ETF marketplace,” says J. Garrett Stevens, chief executive of ETC. “His team has a proven ability to manage and market a successful ETF and our platform will enable them to best leverage that expertise for this new ETF.”
“ETC has offered us the guidance and service relationships necessary to bring this rules-based ETF concept to market expediently,” says Del Vecchio. “Our expertise in using forensic accounting at the core of our investment analysis has already been validated for ETF investors on the short side. They will soon have the opportunity to capitalise on our earnings quality-based strategy in a long-only index structure too.”