These days, investors have many more options beyond
traditional cap-weighted exchange traded funds, or those funds
that assign weights to holdings based on market value.
That is one way of doing things and it is a methodology that
ETF sponsors have used for years, but investors have also been
alternative weighting methodologies
often provided investors with the lowest fees, some funds that
are constructed on fundamental factors are worthy of
consideration as well. That is the case because there are plenty
of examples where fundamental screening can result in superior
returns for investors.
Or investors can merely say that fundamentals are an integral
part of the stock picking process and acknowledge that what works
at the single stock level can certainly be efficacious with ETFs.
With that in mind, here are some ETFs built on fundamental
factors, not cap-weighting, that may not be getting the
appreciation they deserve.
First Trust Europe AlphaDEX Fund (NYSE:
) Monday's negativity serves as a reminder that all is still not
well in Europe, particularly in the peripheral countries such as
Italy and Spain. It cannot be forgotten that factors such as the
banking system, public policy and household capacity could weigh
on or be catalysts for European equities over the next two
No, Europe is not sanguine as global investors had previously
hoped, but FEP's methodology may help investors skirt some
European risk. FEP's constituents are ranked on growth factors
such as sales to price and one year sales growth and value
factors such as cash flow to price and return on assets.
FEP, which will turn two years old in April, avoids
single-stock risk by allocating just 1.15 percent to its largest
holding and the fund
is not heavy on PIIGS stocks
The U.K. accounts for 26 percent of FEP's weight while Sweden
and Norway combine for almost 11 percent, indicating there is
significant non-Eurozone exposure in the fund. FEP is up 12
percent in the past year, but still offers a play
on attractive European equity valuations
with a P/E ratio of 11.81 and a price-to-book ratio of 1.15.
The iShares S&P Europe 350 Index Fund (NYSE:
has a P/E of almost 17 and a price-to-book of
PowerShares FTSE RAFI Emerging Markets Portfolio (NYSE:
) Just as FEP faces intense competition in the market for
diversified Europe ETFs, the PowerShares FTSE RAFI Emerging
Markets Portfolio deals with the same situation among
multi-country emerging markets ETFs.
With almost $388 million in assets under management and
average daily volume of nearly 115,000 shares, calling PXH
anonymous "obscure" is not accurate, but it is fair to say the
ETF is not as well known as some diversified emerging markets
Components for PXH are selected based on book value, cash
flow, sales and dividends and weighted based on a fundamental
score. That methodology can work in the right environment as PXH
has returned about 8.4 percent over the past six months, but
investors do need to do some homework before jumping in.
Since dividends are part of PXH's screening methodology, that
means the ETF will almost certainly have large allocations to
Taiwan and Brazil, two of the developing nations with solid
dividend reputations. Not surprisingly, those two countries
account for nearly 35 percent of the fund's weight.
Combine the dividend factor with the cash flow and book value
screens and it would also be reasonable to expect Russia to loom
large in this fund. That is the case because the government there
has forced state-controlled enterprises to boost dividends.
Additionally, Russian firms have a reputation for being quite
profitable, but also for
trading at discounts
to peers in other developing markets.
Bottom line: Russia accounts for over 11 percent of PXH's
weight and two Russian stocks - Gazprom and Lukoil - are the
ETF's top two holdings.
For more on ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
Gain access to more investing ideas, tools & education.
Get Started on Marketfy, the first ever curated
& verified Marketplace for everything trading.