Barclays has long been a leader in the ETN market as the company
has several dozen products under its iPath and ETN+ brand names.
However, product development has been on a hiatus as of late, as
the firm didn't launch a product for roughly a one year span
despite the continued growth of the broader ETF industry.
Fortunately, this appears to be coming to an end as the firm
recently revealed its latest addition to its lineup, this time with
a focus on American equities. The new note, the
Barclays ETN+ Shiller CAPE ETN (
CAPE
)
, looks to give investors a new way to play the markets using an
interesting methodology from one of the brightest minds in the
investing world, Robert Shiller.
The ETN will utilize the Cyclically Adjusted PE Ratio, or CAPE
Ratio, as the main component of the index's methodology. This
Shiller developed metric takes into account the average
inflation-adjusted earnings from the previous 10 years in order to
come up with a PE that is potentially smoother and more
representative of the long-term potential and health of stocks (see
Three Low Beta Sector ETFs
).
Currently, this metric, for the S&P 500 is coming in below
22.5, although it should be noted that this well above the
mean
since 1870 which is 16.44
, and even higher above the median which is at 15.85. Meanwhile, it
is also worth pointing out that the CAPE ratio is well within
historical peaks and nadirs, as the minimum reading for this figure
was just below 5 while the maximum was over 44.
Yet, this is just for the broad market, a factor that the CAPE
ETN will take into account but not one that the note will be
entirely based on. Instead, the note will drill down in order to
find the CAPE ratio for the various market sectors in order to find
the ones that are the most undervalued from a historical
perspective (see
ETFs Vs. ETNs: What's The Difference?
).
According to IndexUniverse
, the company will select for investment the four most undervalued
sectors that possess relatively strong price momentum over the past
year. This will be represented by equally weighted notional long
position in the total return versions of the various sectors that
are picked for inclusion in the ETN's benchmark.
In this way, the CAPE ETN looks to target the segments of the
economy that are the most undervalued while forgoing exposure to
segments which are potentially the most overvalued. With this
strategy, the ETN looks to beat out broad benchmarks which do not
possess this type of sector shifting exposure.
"The ETN utilizes Professor Shiller's frequently cited CAPE
ratio applied for the first time to sectors to create a
value-oriented sector strategy developed through research conducted
by Barclays and Professor Shiller over the course of a year-long
collaboration,"
said Laurence Black
, a Director in Equity and Funds Structured Markets (EFS) at
Barclays.
It should also be noted that the product looks to charge
investors 45 basis points a year in fees, which is a reasonable
level for an ETN. However, volumes are likely to be low for the
product and a lack of preparedness on the part of the provider-
no information was available on the site
on day two of the product's life-suggests that this could have some
trouble garnering assets, at least in the short-term (read
The Truth about Low Volume ETFs
).
With that being said, the product does offer up a novel way to
target broad American markets in a way that potentially avoids
lower quality sectors at the same time. While no other ETN or ETF
utilizes the CAPE methodology, there are a handful out there that
are also looking for undervalued stocks or sectors, which could
pose as potential competitors to the newly launched CAPE ETN.
One of the newest ones, the
Huntington US Equity Rotation Strategy ETF (
HUSE
)
, looks to underweight and overweight various sectors of the
S&P Composite 1500 in order to outperform the broad market. The
product is a tad expensive at 1.29% a year, while volumes are
rather low suggesting wide bid ask spreads as well (see
Huntington Bank Launches New ETF
).
Another product that could offer up some competition is the
relatively new
Rockledge SectorSAM ETF (
SSAM
)
from AdvisorShares. This product looks to invest in top performing
sectors as well, although it will also short ones that are expected
to underperform, creating a dollar neutral portfolio overall. Once
again, fees are a little high when compared to broad market funds
with SSAM charging 1.5% per year (Read
AdvisorShares Launches Rockledge SectorSAM ETF
).
While these might not have the most assets, there still appears
to be a solid demand for rotational strategies in today's market
environment, especially if certain industries continue to move
independently of their peers to a large extent. Should this trend
continue, investors may want to consider a closer look at CAPE, or
other exchange-traded products in the space, in order to benefit
from this situation over the long term.
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(CAPE): ETF Research Reports
HUNT-US EQ ROT (HUSE): ETF Research Reports
ROCKLG-SECTORSM (SSAM): ETF Research Reports
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