A long-standing staple of the ETF business has been, and
probably always will be to some extent, the passively managed index
fund. An index fund, in most cases, is everything its name implies:
A fund constructed using the securities of a specific index, be it
the S&P 500, the MSCI Emerging Markets Index or another
Since most indexes are weighted by market capitalization, that
means most index funds use cap-weighting methodology. Translation:
The index's largest holdings are usually those with the largest
In terms of gathering assets, this approach has worked well for
ETF sponsors, but as the industry has grown, savvy investors have
sought out opportunities beyond traditional cap-weighting.
have served as a popular avenue
for investors looking to escape the cap-weighting rut.
Additionally, factor-based ETFs have increased in popularity. A
simple definition of factor-based ETFs is that these funds are not
quite actively managed per se, but they go far beyond the passive,
cap-weighting routine by using
growth, valuation and technical factors
Obviously, investors will want to know if factor-based ETFs
generate noteworthy returns relative to their cap-weighted rivals.
In some cases, the answer is a resounding yes, so do not forget
about these factor-based funds.
PowerShares DWA Developed Markets Technical Leaders Portfolio
) PIZ is the developed markets equivalent of the popular
PowerShares DWA Emerging Markets Technical Leaders
PIZ excludes U.S.-based companies and its holdings (usually 100,
but currently 104) can be domiciled in, but not limited to but not
limited to Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Greece, Hong Kong, Ireland, Italy, Japan,
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,
Sweden, Switzerland and the United Kingdom.
And like PIE, PIZ holds stocks that are displaying impressive
relative strength traits. That does have a positive impact on
returns. Year-to-date and over the past 12 and 36 months, PIZ's
underlying index, the Dorsey Wright Developed Markets Technical
Leaders Index, has outpaced
the MSCI EAFE Index and the MSCI EAFE Growth
SPDR S&P 1500 Value Tilt ETF (NYSE:
) A quick glance at the top holdings of the SPDR S&P 1500 Value
Tilt ETF might indicate that this is a cap-weighted ETF. A top-10
lineup that includes Exxon Mobil (NYSE:
), AT&T (NYSE:
) and Chevron (NYSE:
) has a way of doing that.
However, is far from cap-weighted. This ETF takes stocks that
are inexpensive on a valuation basis relative to the S&P 1500
index and overweights those names. Stocks that are expensive
relative to that index are underweighted in VLU. Valuation is based
on the ratio of its price to its level of earnings, cash flow,
sales, book value, and dividends, according to
to State Street
There are a few knocks on VLU. The ETF is up just two percent
this year, meaning a simple S&P 500 index ETF would have been a
better bet. Additionally, VLU's average daily volume is just 140
shares. Although the ETF's underlying holdings are highly liquid,
that volume number has the potential to scare investors away. If
the volume does not do that, then the fact that VLU has not traded
in almost three weeks just might do the trick.
First Trust China AlphaDEX Fund (NYSE:
) With the recent resurgence of China ETFs,
debate has intensified
regarding which ETF is best for playing the world's second-largest
economy. Investors that can see past FCA's low assets under
management number ($2.4 million) will see this ETF is worthy of a
place in the conversation.
FCA holds true to the
the AlphaDEX methodology, which has proven
successful with other First Trust ETFs
. That means the fund's 50 holdings are selected based on factors
including 3-, 6- and 12- month price appreciation, sales to price
and one year sales growth, and separately on value factors
including book value to price, cash flow to price and return on
assets, according to First Trust.
FCA's largest sector weight is financial services, but the
allocation is 26.7 percent, so it is fair to say this ETF is not
excessively weighted to Chinese banks as is the largest China ETF,
the iShares FTSE China 25 Index Fund (NYSE:
). Overall, FCA offers exposure to 10 sectors, double the number of
sectors tracked by FXI.
Valuation should not be ignored here because that has been one
of the calling cards of China bulls over the past year. Indeed, FXI
can still be viewed as inexpensive with a price-to-earnings ratio
below 13 and price-to-book ratio of 1.61,
according to iShares data
. FCA is cheaper with a P/E ratio of less than 9.2 and a
price-to-book ratio of just 1.17.
For more on ETFs, click
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