By Christian Magoon
CEO, Magoon Capital
Many investors are searching for a different way to approach the U.S. equity market as benchmarks like the S&P 500 (SPY) have meager returns in 2012. One approach is to examine alpha ETFs, which are ETFs that seek to outperform the market. Several alpha ETFs are generating close to double digit returns this year by implementing unique investment strategies. Here are three highlighted alpha ETFs and the strategies they employ in an attempt to beat the market.
- First Trust US IPO Index Fund (FPX) - Initial Public Offerings
- PowerShares DWA Technical Leaders Portfolio (PDP) - Relative Strength
- Guggenheim Spin- Off ETF (CSD) - Spin- Offs
The road less traveled has been fruitful for these three ETFs in 2012 and beyond. They have all generated impressive performance versus the S&P 500 and Russell 2000 (IWM), a small cap proxy. Here's the chart from the NASDAQ comparing the three alpha ETFs to the two benchmark ETFs.
Let's take a closer look at these three alpha ETFs to understand what drives them.
This First Trust US IPO Index Fund tracks the IPOX 100 US Index which is designed to track selected IPOs over roughly the first 1000 days of trading. While FPX does not purchase a company on the day of the IPO, it owns it shortly afterward. The concept behind this ETF is that IPOs help to diversify a portfolio and may offer attractive returns to investors over the mid term. Contrary to perception, this ETF is not a technology fund in disguise. Currently the top sector is Consumer Cyclicals at 26%, followed by Technology at 24%, Energy at 19% and Industrials at 10%. Not exactly the high flying mix one immediately thinks of when the word IPO is mentioned! Even so FPX has been a high flyer, torching the S&P 500 by about 30% since April of 2006. Here's the chart.
The PowerShares DWA Technical Leaders Portfolio tracks the DWA Technical Leaders Index. This index is designed to own the stocks that have shown superior past leadership, or relative strength, versus their peers. This method works especially well during periods of consistent leadership in the markets. Currently PDP's top three sectors make up 62% of the portfolio. They include Consumer Cyclicals, Industrials and Basic Materials. PDP was launched in 2007 and is solidly outperforming the S&P 500. Here's a chart of PDP since inception versus the S&P 500.
The Guggenheim Spin- Off ETF tracks the Beacon Spin- Off Index. The concept behind CSD is that companies spin - off units to unlock the value in them not currently realized in the market. This dynamic, and the spin -off's new found freedom from the parent, may be able to deliver above market returns. In fact, CSD has been able to do just that. SInce its allocation leans toward mid cap companies, the ETF benchmarks itself against large and mid cap indexes. Here's the performance chart from inception showing, CSD, SPY and the iShares S&P 400 MidCap ETF (IJH).
The three alpha ETFs examined all take different approaches to beating the market. From IPOs to relative strength to spin- offs, each has achieved its goal in 2012 and since inception. While these unique strategies may not be a replacement for a portfolio's core holdings, they may complement existing allocations by adding diversification and potential performance benefits. For those reasons, investors should examine these and other alpha ETFs.