A new exchange traded fund (ETF) is getting ready to launch, but instead of simply tracking an index, the actively managed Short Squeeze Fund (ticker:SQZZ) will give investors a chance to gain long exposure to stocks that are being heavily shorted.

ETF

Short Squeeze Fund ETF will pick stocks normally most of the time

The Short Squeeze Fund will measure its performance against the Russell 2000 (INDEXRUSSELL:RUT), though it won’t track any specific index. By default, the fund’s sub-adviser will pick stocks as any active manager would. But it will also lend securities to short sellers when it thinks there is a good chance of a short squeeze that would generate alpha as investors are forced to cover. Clearly, high short interest is an important factor when looking for short squeeze opportunities, but a draft prospectus filed with the Securities and Exchange Commission says that a variety of fundamental and technical factors will also be taken into account. No doubt the exact process will be a closely guarded trade secret.

SQZZ ETF: Possible sign of a top, wonders Kass

Value investor Doug Kass wondered if this is a “sign of a top?” reports Dimitra DeFotis for Barron’s, neatly summing up the optimistic bent that must be needed to convince people to invest the SQZZ ETF.

First, the reason passive ETFs have become so popular in the first place is because they give index-like returns with very low fees. If you just want exposure to the overall market this is usually the cheapest way to get it. With managed or active ETFs the extra management fees mean that ETFs lose the big advantage they have over other types of asset management. The draft prospectus leaves the fee structure blank, and the details will impact how successful the new fund is.

But aside from that, wanting to go long every time the market starts to build short interest in a company is incredibly bullish. You’re basically saying that you think every bear is wrong, every time, and you’re willing to put your money where your mouth is. Even if the S&P 500 (INDEXSP:.INX) is going to soar to new heights with no correction in site, some companies are going to be left behind, and a bit of humility would require investors to check their research before going long on a stock that the market is turning against. Such optimism when cautiousness is called for is exactly what worries people.