Despite some recent weakness in the stock markets, investors
have seen a pretty good year overall with broad benchmarks like the
S&P 500 gaining considerably in the year-to-date time frame. In
fact, the S&P 500 is actually up over 10.8% since the start of
January, marking a pretty solid period for equities even with some
mid-year volatility.
This impressive performance in the first nine months of 2012
suggests that most investors have seen positive returns so far this
year, save for a few underperforming segments. However, this
performance by the benchmark actually pales in comparison to a few
more ‘active’ ETFs which either utilize management’s help to select
securities or follow a more rigorous index that can often screen
out stocks that are poised to underperform (read No Dividend Tax
Debate for These High Yield ETF)..
While these strategies don’t often help investors, there have
been at least a few cases this year in which funds targeting broad
markets with an active or ‘enhanced’ approach have delivered and
generated alpha in their portfolios.
In light of this, we have highlighted a few ETFs below which
have managed to beat out broad benchmarks despite their relatively
high fees and the incredibly solid performance of the S&P 500
in the time frame in question:
PowerShares Fundamental Large Growth Portfolio
(PXLG)
For investors seeking an index-following choice in the large cap
space, PXLG could be an interesting and often overlooked choice.
The ETF tracks the RAFI Fundamental Large Growth index which looks
to give broad exposure to the large cap growth segment, but without
weighting based on market capitalization levels.
Instead, the fund uses an approach from Research Affiliates to
construct the index, weighting securities based on four fundamental
factors; book value, cash flow, sales, and gross dividends. This
process breaks the link between market cap and weight, and thus can
be less influenced by market bubbles and provide a more disciplined
approach to investing (read Time to Consider Pure Growth and Value
ETFs?).
Currently, this results in a portfolio that has roughly
one-fourth of its assets in staples, and then another 20% each in
health care and technology. Top holdings include well-known large
caps like Merck (MRK), Procter & Gamble (PG), and Coca-Cola
(KO), suggesting that it is very focused on mega caps for
exposure.
This technique costs investors a relatively low 39 basis points
a year in fees—after waivers—although volume is quite low
suggesting wider bid ask spreads. Still, the dividend comes in at
about 1.7% a year while the fund has outperformed the S&P 500
by about 400 basis points in the year-to-date time frame.
TrimTabs Float Shrink ETF (TTFS)
The only true active ETF on this list comes to us from one of
the market leaders in non-index following products, AdvisorShares.
The Maryland-based firm has teamed up with TrimTabs to bring
investors this fund which looks to outperform the Russell 3000
index with less volatility by focusing in on liquidity and
fundamental characteristics.
The company believes that stock prices are a function of supply
and demand rather than value, looking for stocks that have seen
their ‘float shrink’ in the trailing 120 days. With this process,
along with a few key fundamental metrics like profitability and
balance sheet ratios, the firm looks to find stocks where a given
amount of money is chasing a smaller number of shares, a process
which hopefully drives up the stock price in the process.
This system currently results in a very spread out fund, as no
one security accounts for more than 1.2% of the total assets. From
a sector look, consumer discretionary takes the top spot at 35% and
is closely trailed by technology which makes up another 255 of the
fund (see Three Overlooked Active ETFs).
The product has handily beat out the S&P 500 on the
year-to-date front, as it has outpaced the benchmark by about 350
basis points in the time frame. However, the cost of the fund is
somewhat high at 0.99% a year while volume is also quite low,
meaning that a wide bid ask spread could be seen when buying or
selling TTFS.
PowerShares Dynamic Market Portfolio (PWC)
This ETF is one of the more popular funds on the list with over
$125 million in AUM, while it is also one of the oldest, coming up
on its 10th birthday next year. The product looks to
track the Dynamic Market Intellidex Index which evaluates companies
based on a variety of criteria in the fundamental sphere.
These criteria include growth, stock valuation, investment
timeliness, as well as risk factors. Based on this ranking system,
the 100 stocks with the best metrics are slated for inclusion in
the index and then PWC (read A Primer on ETF Investing).
Like its PowerShares counterpart, this fund has a focus on large
caps, as represented by top holding Chevron (CVX), and then
Marathon Petroleum (MPC), CVS Caremark (CVS), and Wal-Mart (WMT)
rounding out the top four.
This fund also has a tilt towards technology (19.7%), while a
smattering of other segments receive at least 10% including;
staples, consumer discretionary, energy, financials, health care,
and industrials, suggesting a well spread out portfolio from this
look.
Like the other funds on this list, this product has outperformed
the S&P 500, beating out the benchmark by roughly 250 basis
points since the start of the year. Additionally, the fund has a
net expense ratio of 60 basis points and tight bid ask spreads, so
total costs are unlikely to be too great in this ETF.
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POWERSH-DYN MKT (PWC): ETF Research Reports
PWRSH-FP LG GR (PXLG): ETF Research Reports
TRIMTB-FLT SHRK (TTFS): ETF Research Reports
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