With more than 1,000 products on the market, you'll find all
sorts of exchange traded funds (ETFs) to mimic different
. One of the newer types is quantitative index based ETFs that
promise high-octane returns.
Two primary characteristics of ETFs are that they:
- track the holdings and performance of a defined "index" of
- enable investors to cost-efficiently purchase such an index
as a single basket of securities, which can be bought and sold
like a stock.
indexes are designed
to track the average performance of a group of stocks. In order to
do so, they are weighted by a couple of different methods, with the
most prominent one being the market-weighted method,
Scott Martindale of Trading Markets explains
However, as markets rise, the
tend to overweight large companies at the expense of smaller ones.
In response, enhanced indexing has curried favor recently. [
As Markets Change, New ETFs Come Into Favor.
"The goal [of enhanced indexing] is to identify a subset of
stocks from within a traditional broad-based index that exhibit
certain key characteristics, providing the greatest potential for
The second level of enhanced indexing, or quantitative indexing,
looks at a wider variety of factors that include fundamental,
technical and sentiment-oriented characteristics (e.g. insider
buying, put/call options activity).
This type of indexing relies on playing by rules,
says Elizabeth Trotta for Smart Money
. These ETFs tend to do well in markets that are consistently
moving up or down. In choppy markets, though, they're not as easy
to pin down.
The first level of enhanced indexing looks at fundamental
characteristics such as book value, cash flow, earnings and
Below is a list of a few quant ETFs and their performance
against the S&P 500.
Total Return Since Inception Thru 12/31/07
Total Return S&P 500 Thru 12/31/07
PowerShares Dynamic Large Cap Value Portfolio (
PowerShares Dynamic Industrials Sector Portfolio (
Claymore/Zacks Sector Rotation Portfolio (
Claymore/Sabrient Insider ETF (
As with any ETF, use caution and have a strategy. Just because
these funds in the long-term have outperformed the S&P 500
doesn't mean that they always will. A simple strategy we use is
which you can read about here
For more stories on ETFs, visit our
Sumin Kim contributed to this article.