Weighting ETF holdings by market capitalization reflects the
market's collective judgment of relative worth of securities.
There is no assurance, however, that this collective judgment is
wise.
Some researchers claim that weighting by market
capitalization/valuation fares poorly in returns compared to
other weighting methods. These include weighting holdings by
fundamental financial measures such as price/earnings, earnings
growth and dividend yield.
Over one hundred fundamental ETFs cover every conceivable
asset class, and most have proprietary weighting formulas based
on multiple financial ratios. These are often referred to as
active, semi-active, or dynamic. (See also our reports on
transparent fundamental ETFs and high dividend yield ETFs.) In
many cases Fundamental ETFs have delivered the goods. Here a
smattering of large-cap fundamental ETF returns are shown against
SPY, an S&P 500 ETF:
The typical fundamental/alternative weighting ETF follows the
following steps:
- Identify a list of potential stocks from a cap weighted
benchmark index
- Score each company based on fundamental financial
measures
- Filter out poor scoring companies
- Buy remaining high-scoring firms weighted by fundamental
financial measures
- Identify a list of potential stocks from a cap weighted
benchmark index
- Score each company based on fundamental financial
measures
- Filter out poor scoring companies
- Buy remaining high-scoring firms weighted by fundamental
financial measures
Identify a list of potential stocks from a cap weighted
benchmark index
Score each company based on fundamental financial
measures
Filter out poor scoring companies
Buy remaining high-scoring firms weighted by fundamental
financial measures
Such schemes are based on various mathematical formulas with
an eye to exploiting behavioral psychology. In First Trust's
Alphadex line, for instance, "a value model is applied to exploit
the tendency of investors to extrapolate past results and a
growth model is applied to take advantage of the tendency for
investors to under-react to new information." The Alphadex value
model uses book value-to-price, cash flow-to-price ratios and
return on assets. The growth model uses momentum of price
appreciation over three, six and 12 months, one-year sales growth
rate and sales-to-price ratio. Both models can be used
simultaneously in a single fund.
Fundamental ETFs are fertile ground for theoretical
discussion. At first blush they might seem to imply that there is
a free lunch, something that most economists should not in theory
happen over time. But they may not be a direct broadside against
efficient market theory. Long periods of outperformance does not
ensure perpetual outperformance. Historical stock analysis is
full of examples of successful strategies which bomb the minute
they are declared long-term winners (the supposed value premium
being the most famous example). And clearly the more assets they
attract, the more they will crowd out their own strategies and
help to create an efficient market.
The fees of some fundamental ETFs make their task harder.
Fundamental ETFs must outperform cap-weighted ETFs by 0.5% or so
per year just to recoup their higher fees before they begin to
benefit investors. For instance, First Trust Large Cap Core
AlphaDEX ETF (NYSEArca:FEX), with annual fees of 0.7%,
essentially goes head-to-head with dirt-cheap S&P 500 ETFs at
0.1% in fees.
Other large company and broad-market fundamental ETFs
include:
- PowerShares FTSE RAFI US 1000 Portfolio ETF
(NYSEArca:PRF), annual fees: 0.6%
- PowerShares Active Mega Cap ETF (NYSEArca:PMA), annual
fees: 0.75%
- PowerShares Active Alpha Multi-Cap ETF (NYSEArca:PQZ),
annual fees: 0.75%
- Various offerings address small and mid-cap asset
classes:
- First Trust Mid Cap Core AlphaDEX ETF (NYSEArca:FNX),
annual fees: 0.7%
- PowerShares Dynamic Small Cap Portfolio ETF (
PJM
), annual fees: 0.6%
- PowerShares Dynamic Mid Cap Portfolio ETF (
PJG
), annual fees: 0.6%
- First Trust Small Cap Core AlphaDEX ETF (NYSEArca:FYX),
annual fees: 0.7%
- PowerShares FTSE RAFI US 1000 Portfolio ETF (NYSEArca:PRF),
annual fees: 0.6%
- PowerShares Active Mega Cap ETF (NYSEArca:PMA), annual
fees: 0.75%
- PowerShares Active Alpha Multi-Cap ETF (NYSEArca:PQZ),
annual fees: 0.75%
- Various offerings address small and mid-cap asset
classes:
- First Trust Mid Cap Core AlphaDEX ETF (NYSEArca:FNX),
annual fees: 0.7%
- PowerShares Dynamic Small Cap Portfolio ETF (
PJM
), annual fees: 0.6%
- PowerShares Dynamic Mid Cap Portfolio ETF (
PJG
), annual fees: 0.6%
- First Trust Small Cap Core AlphaDEX ETF (NYSEArca:FYX),
annual fees: 0.7%
PowerShares FTSE RAFI US 1000 Portfolio ETF (NYSEArca:PRF),
annual fees: 0.6%
PowerShares Active Mega Cap ETF (NYSEArca:PMA), annual fees:
0.75%
PowerShares Active Alpha Multi-Cap ETF (NYSEArca:PQZ), annual
fees: 0.75%
Various offerings address small and mid-cap asset
classes:
First Trust Mid Cap Core AlphaDEX ETF (NYSEArca:FNX), annual
fees: 0.7%
PowerShares Dynamic Small Cap Portfolio ETF (
PJM
), annual fees: 0.6%
PowerShares Dynamic Mid Cap Portfolio ETF (
PJG
), annual fees: 0.6%
First Trust Small Cap Core AlphaDEX ETF (NYSEArca:FYX),
annual fees: 0.7%
Other ETFs slice and dice the market by company size and
growth vs. value characteristics:
- First Trust Large Cap Growth Opportunities AlphaDEX ETF
(NYSEArca:FTC), annual fees: 0.7%
- First Trust Large Cap Value Opportunities AlphaDEX ETF
(NYSEArca:FTA), annual fees: 0.7%
- First Trust Multi Cap Growth AlphaDEX ETF (NYSEArca:FAD),
annual fees: 0.7%
- First Trust Multi Cap Value AlphaDEX ETF (NYSEArca:FAB),
annual fees: 0.7%
- PowerShares Dynamic Large Cap Value ETF (
PWV
), annual fees: 0.6%
- PowerShares Dynamic Mid Cap Growth Portfolio ETF (
PWJ
), annual fees: 0.6%
- PowerShares Dynamic Mid Cap Value Portfolio ETF (
PWP
), annual fees: 0.6%
- PowerShares Dynamic Small Cap Growth ETF (
PWT
), annual fees: 0.6%
- PowerShares Dynamic Small Cap Value ETF (
PWY
), annual fees: 0.6%
- For sector investors there are numerous offerings:
- First Trust Utilities AlphaDEX ETF (NYSEArca:FXU), annual
fees: 0.7%
- PowerShares Dynamic Banking Portfolio ETF (
PJB
), annual fees: 0.6%
- PowerShares Dynamic Basic Materials Sector Portfolio ETF
(
PYZ
), annual fees: 0.6%
- PowerShares Dynamic Biotechnology & Genome ETF (
PBE
), annual fees: 0.6%
- PowerShares Dynamic Building & Construction Portfolio
ETF (
PKB
), annual fees: 0.6%
- PowerShares Dynamic Consumer Discretionary Sector
Portfolio ETF (
PEZ
), annual fees: 0.6%
- PowerShares Dynamic Consumer Staples Sector Portfolio ETF
(
PSL
), annual fees: 0.6%
- PowerShares Dynamic Energy Exploration & Production
Portfolio ETF (
PXE
), annual fees: 0.6%
- PowerShares Dynamic Energy Sector Portfolio ETF (
PXI
), annual fees: 0.6%
- PowerShares Dynamic Financials Sector Portfolio ETF (
PFI
), annual fees: 0.6%
- PowerShares Dynamic Food & Beverage Portfolio ETF (
PBJ
), annual fees: 0.6%
- PowerShares Dynamic Healthcare Sector Portfolio ETF (
PTH
), annual fees: 0.6%
- PowerShares Dynamic Healthcare Services Portfolio ETF (
PTJ
), annual fees: 0.6%
- PowerShares Dynamic Industrials Sector Portfolio ETF (
PRN
), annual fees: 0.6%
- PowerShares Dynamic Insurance Portfolio ETF (
PIC
), annual fees: 0.6%
- PowerShares Dynamic Leisure & Entertainment Portfolio
ETF (
PEJ
), annual fees: 0.6%
- PowerShares Dynamic Media Portfolio ETF (
PBS
), annual fees: 0.5%
- PowerShares Dynamic Networking Portfolio ETF (
PXQ
), annual fees: 0.6%
- PowerShares Dynamic Oil & Gas Services Portfolio ETF
(
PXJ
), annual fees: 0.6%
- PowerShares Dynamic Pharmaceuticals ETF (
PJP
), annual fees: 0.6%
- PowerShares Dynamic Retail Portfolio ETF (
PMR
), annual fees: 0.6%
- PowerShares Dynamic Semiconductors Portfolio ETF (
PSI
), annual fees: 0.6%
- PowerShares Dynamic Software Portfolio ETF (
PSJ
), annual fees: 0.6%
- PowerShares Dynamic Technology Sector Portfolio ETF (
PTF
), annual fees: 0.6%
- PowerShares Dynamic Telecommunications & Wireless
Portfolio ETF (
PTE
), annual fees: 0.6%
- PowerShares Dynamic Utilities Portfolio ETF (
PUI
), annual fees: 0.6%
- First Trust Technology AlphaDEX ETF (NYSEArca:FXL),
annual fees: 0.7%
- First Trust Consumer Discretionary AlphaDEX ETF (
FXD
), annual fees: 0.7%
- First Trust Consumer Staples AlphaDEX ETF (
FXG
), annual fees: 0.7%
- First Trust Energy AlphaDEX ETF (NYSEArca:FXN), annual
fees: 0.7%
- First Trust Financials AlphaDEX ETF (NYSEArca:FXO),
annual fees: 0.7%
- First Trust Health Care AlphaDEX ETF (NYSEArca:FXH),
annual fees: 0.7%
- First Trust Industrials AlphaDEX ETF (NYSEArca:FXR),
annual fees: 0.7%
- First Trust Materials AlphaDEX ETF (NYSEArca:FXZ), annual
fees: 0.7%
- First Trust Large Cap Growth Opportunities AlphaDEX ETF
(NYSEArca:FTC), annual fees: 0.7%
- First Trust Large Cap Value Opportunities AlphaDEX ETF
(NYSEArca:FTA), annual fees: 0.7%
- First Trust Multi Cap Growth AlphaDEX ETF (NYSEArca:FAD),
annual fees: 0.7%
- First Trust Multi Cap Value AlphaDEX ETF (NYSEArca:FAB),
annual fees: 0.7%
- PowerShares Dynamic Large Cap Value ETF (
PWV
), annual fees: 0.6%
- PowerShares Dynamic Mid Cap Growth Portfolio ETF (
PWJ
), annual fees: 0.6%
- PowerShares Dynamic Mid Cap Value Portfolio ETF (
PWP
), annual fees: 0.6%
- PowerShares Dynamic Small Cap Growth ETF (
PWT
), annual fees: 0.6%
- PowerShares Dynamic Small Cap Value ETF (
PWY
), annual fees: 0.6%
- For sector investors there are numerous offerings:
- First Trust Utilities AlphaDEX ETF (NYSEArca:FXU), annual
fees: 0.7%
- PowerShares Dynamic Banking Portfolio ETF (
PJB
), annual fees: 0.6%
- PowerShares Dynamic Basic Materials Sector Portfolio ETF (
PYZ
), annual fees: 0.6%
- PowerShares Dynamic Biotechnology & Genome ETF (
PBE
), annual fees: 0.6%
- PowerShares Dynamic Building & Construction Portfolio
ETF (
PKB
), annual fees: 0.6%
- PowerShares Dynamic Consumer Discretionary Sector Portfolio
ETF (
PEZ
), annual fees: 0.6%
- PowerShares Dynamic Consumer Staples Sector Portfolio ETF (
PSL
), annual fees: 0.6%
- PowerShares Dynamic Energy Exploration & Production
Portfolio ETF (
PXE
), annual fees: 0.6%
- PowerShares Dynamic Energy Sector Portfolio ETF (
PXI
), annual fees: 0.6%
- PowerShares Dynamic Financials Sector Portfolio ETF (
PFI
), annual fees: 0.6%
- PowerShares Dynamic Food & Beverage Portfolio ETF (
PBJ
), annual fees: 0.6%
- PowerShares Dynamic Healthcare Sector Portfolio ETF (
PTH
), annual fees: 0.6%
- PowerShares Dynamic Healthcare Services Portfolio ETF (
PTJ
), annual fees: 0.6%
- PowerShares Dynamic Industrials Sector Portfolio ETF (
PRN
), annual fees: 0.6%
- PowerShares Dynamic Insurance Portfolio ETF (
PIC
), annual fees: 0.6%
- PowerShares Dynamic Leisure & Entertainment Portfolio
ETF (
PEJ
), annual fees: 0.6%
- PowerShares Dynamic Media Portfolio ETF (
PBS
), annual fees: 0.5%
- PowerShares Dynamic Networking Portfolio ETF (
PXQ
), annual fees: 0.6%
- PowerShares Dynamic Oil & Gas Services Portfolio ETF (
PXJ
), annual fees: 0.6%
- PowerShares Dynamic Pharmaceuticals ETF (
PJP
), annual fees: 0.6%
- PowerShares Dynamic Retail Portfolio ETF (
PMR
), annual fees: 0.6%
- PowerShares Dynamic Semiconductors Portfolio ETF (
PSI
), annual fees: 0.6%
- PowerShares Dynamic Software Portfolio ETF (
PSJ
), annual fees: 0.6%
- PowerShares Dynamic Technology Sector Portfolio ETF (
PTF
), annual fees: 0.6%
- PowerShares Dynamic Telecommunications & Wireless
Portfolio ETF (
PTE
), annual fees: 0.6%
- PowerShares Dynamic Utilities Portfolio ETF (
PUI
), annual fees: 0.6%
- First Trust Technology AlphaDEX ETF (NYSEArca:FXL), annual
fees: 0.7%
- First Trust Consumer Discretionary AlphaDEX ETF (
FXD
), annual fees: 0.7%
- First Trust Consumer Staples AlphaDEX ETF (
FXG
), annual fees: 0.7%
- First Trust Energy AlphaDEX ETF (NYSEArca:FXN), annual
fees: 0.7%
- First Trust Financials AlphaDEX ETF (NYSEArca:FXO), annual
fees: 0.7%
- First Trust Health Care AlphaDEX ETF (NYSEArca:FXH), annual
fees: 0.7%
- First Trust Industrials AlphaDEX ETF (NYSEArca:FXR), annual
fees: 0.7%
- First Trust Materials AlphaDEX ETF (NYSEArca:FXZ), annual
fees: 0.7%
First Trust Large Cap Growth Opportunities AlphaDEX ETF
(NYSEArca:FTC), annual fees: 0.7%
First Trust Large Cap Value Opportunities AlphaDEX ETF
(NYSEArca:FTA), annual fees: 0.7%
First Trust Multi Cap Growth AlphaDEX ETF (NYSEArca:FAD),
annual fees: 0.7%
First Trust Multi Cap Value AlphaDEX ETF (NYSEArca:FAB),
annual fees: 0.7%
PowerShares Dynamic Large Cap Value ETF (
PWV
), annual fees: 0.6%
PowerShares Dynamic Mid Cap Growth Portfolio ETF (
PWJ
), annual fees: 0.6%
PowerShares Dynamic Mid Cap Value Portfolio ETF (
PWP
), annual fees: 0.6%
PowerShares Dynamic Small Cap Growth ETF (
PWT
), annual fees: 0.6%
PowerShares Dynamic Small Cap Value ETF (
PWY
), annual fees: 0.6%
For sector investors there are numerous offerings:
First Trust Utilities AlphaDEX ETF (NYSEArca:FXU), annual
fees: 0.7%
PowerShares Dynamic Banking Portfolio ETF (
PJB
), annual fees: 0.6%
PowerShares Dynamic Basic Materials Sector Portfolio ETF (
PYZ
), annual fees: 0.6%
PowerShares Dynamic Biotechnology & Genome ETF (
PBE
), annual fees: 0.6%
PowerShares Dynamic Building & Construction Portfolio ETF
(
PKB
), annual fees: 0.6%
PowerShares Dynamic Consumer Discretionary Sector Portfolio
ETF (
PEZ
), annual fees: 0.6%
PowerShares Dynamic Consumer Staples Sector Portfolio ETF (
PSL
), annual fees: 0.6%
PowerShares Dynamic Energy Exploration & Production
Portfolio ETF (
PXE
), annual fees: 0.6%
PowerShares Dynamic Energy Sector Portfolio ETF (
PXI
), annual fees: 0.6%
PowerShares Dynamic Financials Sector Portfolio ETF (
PFI
), annual fees: 0.6%
PowerShares Dynamic Food & Beverage Portfolio ETF (
PBJ
), annual fees: 0.6%
PowerShares Dynamic Healthcare Sector Portfolio ETF (
PTH
), annual fees: 0.6%
PowerShares Dynamic Healthcare Services Portfolio ETF (
PTJ
), annual fees: 0.6%
PowerShares Dynamic Industrials Sector Portfolio ETF (
PRN
), annual fees: 0.6%
PowerShares Dynamic Insurance Portfolio ETF (
PIC
), annual fees: 0.6%
PowerShares Dynamic Leisure & Entertainment Portfolio ETF
(
PEJ
), annual fees: 0.6%
PowerShares Dynamic Media Portfolio ETF (
PBS
), annual fees: 0.5%
PowerShares Dynamic Networking Portfolio ETF (
PXQ
), annual fees: 0.6%
PowerShares Dynamic Oil & Gas Services Portfolio ETF (
PXJ
), annual fees: 0.6%
PowerShares Dynamic Pharmaceuticals ETF (
PJP
), annual fees: 0.6%
PowerShares Dynamic Retail Portfolio ETF (
PMR
), annual fees: 0.6%
PowerShares Dynamic Semiconductors Portfolio ETF (
PSI
), annual fees: 0.6%
PowerShares Dynamic Software Portfolio ETF (
PSJ
), annual fees: 0.6%
PowerShares Dynamic Technology Sector Portfolio ETF (
PTF
), annual fees: 0.6%
PowerShares Dynamic Telecommunications & Wireless
Portfolio ETF (
PTE
), annual fees: 0.6%
PowerShares Dynamic Utilities Portfolio ETF (
PUI
), annual fees: 0.6%
First Trust Technology AlphaDEX ETF (NYSEArca:FXL), annual
fees: 0.7%
First Trust Consumer Discretionary AlphaDEX ETF (
FXD
), annual fees: 0.7%
First Trust Consumer Staples AlphaDEX ETF (
FXG
), annual fees: 0.7%
First Trust Energy AlphaDEX ETF (NYSEArca:FXN), annual fees:
0.7%
First Trust Financials AlphaDEX ETF (NYSEArca:FXO), annual
fees: 0.7%
First Trust Health Care AlphaDEX ETF (NYSEArca:FXH), annual
fees: 0.7%
First Trust Industrials AlphaDEX ETF (NYSEArca:FXR), annual
fees: 0.7%
First Trust Materials AlphaDEX ETF (NYSEArca:FXZ), annual
fees: 0.7%
A handful of international oriented ETFs allow exposure
abroad:
- PowerShares FTSE RAFI Asia Pacific ex-Japan ETF
(NYSEArca:PAF), annual fees: 0.8%
- PowerShares FTSE RAFI Developed Markets ETF
(NYSEArca:PXF), annual fees: 0.75%
- PowerShares FTSE RAFI Developed Markets ex-US Small-Mid
Portfolio ETF (
PDN
), annual fees: 0.75%
- PowerShares FTSE RAFI Emerging Markets Portfolio ETF (
PXH
), annual fees: 0.85%
- PowerShares FTSE RAFI Europe ETF (NYSEArca:PEF), annual
fees: 0.75%
- PowerShares FTSE RAFI Japan ETF (NYSEArca:PJO), annual
fees: 0.75%
- Finally there are various hard-to-classify ETFs:
- PowerShares Active AlphaQ ETF (NYSEArca:PQY), annual
fees: 0.75%
- PowerShares Dynamic Developed International Opportunities
Portfolio ETF (
PFA
), annual fees: 0.75%
- PowerShares Dynamic MagniQuant Portfolio ETF (
PIQ
), annual fees: 0.6%
- PowerShares Dynamic Market Portfolio ETF (
PWC
), annual fees: 0.6%
- PowerShares Dynamic OTC Portfolio ETF (
PWO
), annual fees: 0.6%
- PowerShares FTSE RAFI Asia Pacific ex-Japan ETF
(NYSEArca:PAF), annual fees: 0.8%
- PowerShares FTSE RAFI Developed Markets ETF (NYSEArca:PXF),
annual fees: 0.75%
- PowerShares FTSE RAFI Developed Markets ex-US Small-Mid
Portfolio ETF (
PDN
), annual fees: 0.75%
- PowerShares FTSE RAFI Emerging Markets Portfolio ETF (
PXH
), annual fees: 0.85%
- PowerShares FTSE RAFI Europe ETF (NYSEArca:PEF), annual
fees: 0.75%
- PowerShares FTSE RAFI Japan ETF (NYSEArca:PJO), annual
fees: 0.75%
- Finally there are various hard-to-classify ETFs:
- PowerShares Active AlphaQ ETF (NYSEArca:PQY), annual fees:
0.75%
- PowerShares Dynamic Developed International Opportunities
Portfolio ETF (
PFA
), annual fees: 0.75%
- PowerShares Dynamic MagniQuant Portfolio ETF (
PIQ
), annual fees: 0.6%
- PowerShares Dynamic Market Portfolio ETF (
PWC
), annual fees: 0.6%
- PowerShares Dynamic OTC Portfolio ETF (
PWO
), annual fees: 0.6%
PowerShares FTSE RAFI Asia Pacific ex-Japan ETF
(NYSEArca:PAF), annual fees: 0.8%
PowerShares FTSE RAFI Developed Markets ETF (NYSEArca:PXF),
annual fees: 0.75%
PowerShares FTSE RAFI Developed Markets ex-US Small-Mid
Portfolio ETF (
PDN
), annual fees: 0.75%
PowerShares FTSE RAFI Emerging Markets Portfolio ETF (
PXH
), annual fees: 0.85%
PowerShares FTSE RAFI Europe ETF (NYSEArca:PEF), annual fees:
0.75%
PowerShares FTSE RAFI Japan ETF (NYSEArca:PJO), annual fees:
0.75%
Finally there are various hard-to-classify ETFs:
PowerShares Active AlphaQ ETF (NYSEArca:PQY), annual fees:
0.75%
PowerShares Dynamic Developed International Opportunities
Portfolio ETF (
PFA
), annual fees: 0.75%
PowerShares Dynamic MagniQuant Portfolio ETF (
PIQ
), annual fees: 0.6%
PowerShares Dynamic Market Portfolio ETF (
PWC
), annual fees: 0.6%
PowerShares Dynamic OTC Portfolio ETF (
PWO
), annual fees: 0.6%
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the
University of Texas at Austin.
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the University
of Texas at Austin.