DWSH: This Active Short ETF Doesn’t Measure Up

By Rob Isbitts

AdvisorShares Dorsey Wright Short ETF (NASDAQ:DWSH) is one of a limited number of ETFs that tries to make money in down markets, without leverage. While I consider myself a long-tenured connoisseur and fan of such ETFs, this one just doesn’t do it for me. And I think I have good reasons for that opinion. It just doesn’t add value versus the more straightforward single inverse ETFs that allow an investor to effectively short an index, like the S&P 500, Nasdaq, Dow or Russell 2000 Small Cap indexes.

I rate the shares of DWSH a Hold, but only for the time being. It’s more of a Sell that only gets a reprieve because the stock market appears to again be at risk of a near-term decline. So if I currently held this ETF (which I do not), I would either swap it for a more index-correlated single inverse ETF, or hold it through the next leg down. Once the market finds its footing, or if it heads higher very soon, I’d be out of DWSH, and not likely to return. There are plenty of better options out there, several of which I have recently covered on Seeking Alpha.

Strategy

As DWSH’s prospectus states, it “employs short strategy to create its portfolio. It invests in momentum stocks of large-cap companies. It employs quantitative analysis to create its portfolio. The fund seeks to benchmark the performance of its portfolio against the S&P 500 Index.” This is not an index fund, but rather is actively managed, but using quantitative signals. DWSH is based on the technical analysis system developed decades ago by prominent market technician Tom Dorsey, who is considered one of the leading proponents of “relative strength investing.” As explained here, DWSH essentially looks not for strong relative strength, as many other Dorsey strategies do, but instead reverses the process, and aims for stocks that the manager, Dorsey Wright, believes have the highest relative weakness within its large cap universe.

ETF Grades

• Offense/Defense: Defense

• Segment: Inverse

• Sub-Segment: Active Equity

Technical Ratings

• Short-Term (next 3 months): F

• Long-Term (next 12 months): F

Rating scale: A = Excellent, B = Good, C = Fair, D = Weak, F = Poor

For a detailed description of MII’s proprietary technical rating system, see disclosures at bottom of this report.

Holding Analysis

DWSH’s portfolio shorts about 100 stocks at any time. It also invests in collateral required to maintain those short positions. That collateral could be held in simple T-Bills or similar instruments. However, this ETF owns 2 other funds that do that job for them. One is a mutual fund that owns mostly US Government-backed short-term securities. However, the other is a significant 40% position in AdvisorShares North Square McKee Core Reserves ETF (HOLD). That ETF has a more than 5% drawdown on its track record, which occurred during the market shock of Q1 2020.

Strengths

While DWSH is not an index fund per se, it is entirely rules-based. The decisions are made actively, based on signals generated by Dorsey Wright’s system. Thus, as is the case with index ETFs, this fund removes human emotion from its day-to-day trading decisions. It also does move directionally opposite the stock market, as one would expect an inverse ETF to do. Furthermore, it does not use leverage and actually shorts the stocks. This is a nice throwback to the time when hedging was actually done by shorting stocks. This still exists in the ETF business, but the largest ETFs that try to deliver short exposure to the stock market use derivatives.

Weaknesses

The purple tails you see in the chart below are one of the key sources for my negative outlook on DWSH. It may also be a big reason this ETF, which had plenty of marketing muscle behind it when launched, and accumulated $150mm in AUM while spiking higher and outperforming the inverse S&P 500 during the 5-week stock market debacle in February and March 2020.

But the glory days did not last. DWSH fell apart as expected, once the market rose during the final 3 quarters of 2020. But as the chart below shows, the hits just kept coming, and the fund has now fallen 80% since that time. It aims to benchmark to the opposite of the S&P 500 Index, but SH lost only 2/3 of that. Translation: the quantitative, automated process of DWSH has been way out of sync with what the market is rewarding and not rewarding for a while now.

Opportunities

The only opportunity with DWSH that I see is a fleeting one. The stock market just rallied strongly to start 2023, and a reversal could play into the hands of this ETF, at least briefly. It has shown the ability to generate some alpha on the short side, as in 2020. But that’s not a good enough reason to hold it for any longer a time period than between now and next short-term market flush to the downside.

Threats

I like ETFs because you know what you own. Most offer a strategy that always operates the same way, and I know what I am getting. It is then up to me, the investor, to make any active decisions about which ETFs to own, and when. But the risk with a strategy like DWSH is that its process fails as markets reward different factors than in the past. I think that is part of the problem here.

As if the core of DWSH was not disappointing enough, I have to seriously question why the HOLD ETF position is there. Either it is collateral that takes unusually high credit risk for a short collateral position, or it is just a substitute for shorting more stocks. Frankly, neither is a good look for this ETF and only adds to my concerns.

Conclusions

ETF Quality Opinion

DWSH had good intentions when it debuted, but I just don’t see it as an upgrade over the more straightforward, passive single inverse ETF offerings.

ETF Investment Opinion

DWSH is a Hold, but only because the stock market looks quite challenged at the moment. In other words, if the stock market falls in the near term, as it appears to be at risk of doing, if I owned this ETF (which I don’t), I’d probably swap it to an index inverse ETF (SH, DOG, PSQ, RWM, etc.). But for a short period of time, it can hang in with those more traditional shorting mechanisms from the ETF world. The HOLD ETF position is another reason to bolt right away if I owned this. Thus, the potential to exit on a high note on a near-term rally in this ETF would be the only caveat on what is otherwise my decidedly negative opinion on DWSH.

Modern Income Investor’s proprietary technical rating system was created by the firm’s founder, Rob Isbitts, a chartist for more than 40 years. The ratings emphasize risk-management, and the belief that while any investment can appreciate in price at any time, each investment carries a different level of potential for major loss. The balance of reward and risk is calculated each night for thousands of securities, using a formula that analyzes price trend, strength of that trend and key price levels. It analyzes data over multiple time frames to produce a short-term rating (looking 3 months out) and a long-term rating (looking 12 months out).