Since the Lehman Brothers fiasco a year ago, quantitative investment approaches have not exactly been all the rage among investors.

In that light, the ProShares Credit Suisse 130/30 Index ETF (NYSEArca: CSM) has been raising eyebrows.

Compared to its exchange-traded note rival First Trust Enhanced 130/30 (NYSEArca: JFT), CSM is about evenly matched in performance gains since its launch in July.

And with returns of 6.9 percent heading into Wednesday, it’s only just beating more traditional S&P tracker exchange-traded funds such as the SPDR S&P 500 (NYSEArca: SPY) and the iShares S&P 500 (NYSEArca: IVV) in that period.

Still, a closer look at how the product seeks to create alpha reveals what might be the most exciting enhanced S&P-based ETF around right now.

The Impact Of Structural Alpha

CSM tracks the Credit Suisse 130/30 Index (CSI 130/30), an index developed by MIT economist Andrew Lo and Credit Suisse’s Pankaj Patel. A 130/30 strategy is employed by taking a 100 percent long position, and subsequently selling 30 percent of the portfolio short against it; the proceeds from that short sale are then invested in another 30 percent chunk of long positions.

In part, the index was designed as a more meaningful benchmark for asset managers to pit their performance against than long-only global benchmarks such as the S&P 500.

The leveraged component of CSM’s 130/30 strategy is offset by the fact that the fund’s quantitative model resets its positions on the third Friday of every month back to a beta of 1. In order to get a performance edge, CSM employs something known as structural alpha.

Here’s one example: Ciena and Patterson did well in August because of better-than-expected earnings, and Zions because of a stroke of luck when a Nevada subsidiary’s rival was shuttered by the FDIC. That meant a brief spike in the share prices of all three companies.

These stocks have a cumulative weighting in the S&P of just 0.1 percent, so their day-to-day price movements don’t affect the index that much. By shorting them at around the time of their price spikes, while remaining long in the index’s major components, an investment manager can attempt to gain structural alpha.

And that’s exactly what CSM is doing right now, with a net 4.05 percent short focus on these stocks. Meanwhile, the fund’s top holdings -- Exxon Mobile, JP Morgan Chase and Apple -- collectively make-up just 5.96 percent of the fund, way underweighting the S&P’s allocations for all three of 7.37 percent.

Greater Tracking Error

The strategy gives the fund a tracking error of around 2.3 percent against the S&P compared to average errors of around 0.4 percent that might be expected for most S&P-weighted ETFs. In certain market environments, the tracking error translates into outsized gains versus the index.

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