The market for exchange-traded funds shifted earlier this year into active management. Now, it has moved into hedge-like strategies.

The First Trust Enhanced 130/30 Index (AMEX: JFT) has launched in the form of exchanged-traded notes.

Like its sister ETFs, the new ETN holds a portfolio of stocks. Unlike ETFs, such ETNs are issued and marketed by a large financial institution.

In this case, JPMorgan Chase is working with First Trust Advisors, developer of the ETN's underlying benchmark.

ProShares has a similar type of 130/30 portfolio in registration. But it hasn't come out yet. That means JPMorgan has captured first-mover status among exchange-traded products in the popular hedging strategy.

"We are excited about working together with JPMorgan on this innovative product that provides a convenient way for investors to gain exposure to this 130/30 strategy," said Dan Waldron, First Trust's senior vice president.

The portfolio is a modified equal-weighted total return index designed to offer 130% long and 30% short exposure to selected large-capitalization U.S. publicly traded equity securities.

JFT is expected to charge an annual expense ratio of 0.95% and will be rebalanced quarterly.

Sophisticated Strategies

"It certainly represents a step up in sophistication in terms of the types of products available to individual investors through exchange-traded products," said Roger Nusbaum, chief investment officer at Your Source Financial in Phoenix, Ariz.

The 130/30 type of strategies are largely used by hedge fund managers, although open-end mutual funds in recent years have also started implementing the formula.

In such a leveraged strategy, portfolios take a 130% long position with its assets. At the same time, another 30% is invested in short positions. The idea is to wind up with net 100% long exposure.

But here's the wrinkle. Such 130/30 funds basically achieve that overall allocation by using three different buckets: a long position, a short position and a leveraged-long position.

"The 100% long position is similar to your normal portfolio," Nusbaum said. "With the leveraged-long 30% and the short 30%, you can pair those off against one another to implement more sophisticated strategies."

For example, say JFT had been around for awhile and put its leveraged-long portion into energy stocks. Then, it might've used the other 30% to short financials. Of course, energy has soared in the past 12 months while financials have been hit hard.

In theory at least, such a 130/30 tactic would've given the fund terrific results.

But some challenges could be in store for an ETN trying this sophisticated strategy.

"At big turns in market cycles, some open-end mutual funds in this alternative strategy really have really done poorly," Nusbaum observed.

But he has no concerns that the ETN will have a problem tracking its index. "The issue is that the index uses growth factors and value factors to determine long positions," Nusbaum said.

Growth factors used by JFT are: three-month, six-month and 12-month price appreciation. The other growth factor is one-year sales growth.

The other half of the picture is the selection process for value names added to the ETN's underlying index. Those will be ranked by factors including: book-to-price, cash-flow-to-price and return on assets. Also, aggregate rankings of both the growth and value factors will be included in long positions.

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