Economist and best-selling author Robert Shiller, who
developed the Case-Shiller Home Price Indexes, has rolled out an
exchange traded note with Barclays Bank.
The awkwardly named fund,Barclays ETN+ Shiller CAPE ETN (
), tracks the Shiller Barclays CAPE US Core Sector Index. The ETN
invests in the four most undervalued sectors among the nine
S&P 500 sectors, based on their cyclically adjusted
) ratio. The four equally weighted sectors must be in an uptrend
to avoid the so-called "value trap," in which cheap names get
The index's current SPDR holdings areFinancial Select Sector (
),Health Care Select Sector (
),Industrial Select Sector (
) andTechnology Select Sector (
The CAPE ratio factors in an average 10 years of earnings. The
ETN was designed as a value play for long-term buy-and-hold
Barclays says the index hypothetically returned an average
annual 11.3% vs. 7.2% for the S&P 500 between Sept. 3, 2002,
and Sept. 28, 2012, with slightly less volatility.
CAPE charges an annual management fee of 0.45%.
Financial advisers are ambivalent about the new ETN.
"The premise of this strategy is that inflation-adjusted
trailing 10-year-industry price-to-earnings ratios, or PE10 have
predictive power," said Rick Ferri, founder of Portfolio
Solutions in Troy, Mich., with $1.1 billion in assets under
management. "The hypothetical performance of the strategy infers
that the four industry sectors with the lowest trailing PE10
relative to their own history have a higher return than four
industry sectors with the highest trailing PE10 relative to their
While the CAPE may have predicted the fall of stocks from 2000
to 2002, it was wrong most of the 1990s and this January, Ferri
"My opinion is that CAPE is too simplistic a yardstick to
determine whether equities or industries are cheap or expensive,"
said Ferri. "Proponents advising buying when the CAPE is cheap
and selling when it is expensive may be waiting decades before
getting into the market or an industry group."
Christian Magoon, founder and CEO of Magoon Capital, which
advises on ETF development and marketing, sees a potential
"Shiller has a strong academic following, and I think the CAPE
methodology will appeal to institutions because of that," Magoon
said. "The methodology of the index and its backtested returns
require a more sophisticated understanding of investing and a
level of trust in the research that isn't easily obtained in the
The ETN is a debt obligation issued by Barclays and doesn't
actually hold stocks. Investors risk losing money should the
issuer fail to make good on the notes or if its credit rating is
"The ETN structure is a bit puzzling as it will narrow the
amount of investors attracted to the product as opposed to an
ETF," said Magoon. "Perhaps the fact that it reallocates monthly
among four equal-weighted sectors may prove more cost efficient
via an ETN."
CAPE will compete with other quantitatively screened ETFs,
such asPowerShares S&P 500 Low Volatility Portfolio (SPLV)
and similarly named funds from iShares.
Barclays and Shiller have rolled out three equity indexes
based on CAPE. They are:
1. Shiller Barclays CAPE US Sector Tilted Index: overweights
four favored sectors and underweights six least-favored sectors,
aiming to provide an "enhanced value" investment.
2. Shiller Barclays CAPE US Sector Index: equal weights four
favored sectors, aiming to provide a "focus value"
3. Shiller Barclays CAPE US Sector Market Hedged Index: holds
a long position in the Shiller Barclays CAPE US Sector Index and
a short position according to the beta of the sectors, aiming to
provide a "market-neutral value" investment.