Two Top Ideas Among Fundamentally-Weighted ETFs
Through the first four months of 2013, global exchange traded products inflows totaled $79 billion with a fair amount of that total going to traditional, market capitalization-weighted products. However, alternative weighting methodologies are gaining traction with investors.
Non-Market Cap weighted funds have captured 42 percent of Equity ETP flows YTD, more than two times their share of Equity assets. Key drivers in this category are Dividend Income with flows of $3.4bn in April - a new record monthly high - and $10.9bn YTD as well as Minimum Volatility with $2.5bn in April and $6.5bn YTD, according to BlackRock.
Prying investors, both professionals and retail, away from cap-weighted ETFs can be tricky business. That much is proven by the fact that at this point, it is widely known that the Guggenheim S&P 500 Equal Weight ETF (NYSE: RSP) has easily outpaced the SPDR S&P 500 (NYSE: SPY) over long time horizons. Yet, SPY has $139.6 billion in assets under management compared to $3.91 billion for RSP.
However, RSP merely stands as one example of a non-cap weighted ETF. There are others that use more intricate, fundamental weighting methodologies that have recently delivered solid returns. Here are some of the top ideas from the world of fundamentally-weighted ETFs.
PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio (NYSE: PXF)
The PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio is not quite a Japan ETF, but with Japanese stocks soaring this year, this ETF offers a nice advantage with a 22.4 percent weight to the world's third-largest economy.
That is the good news. The potentially bad news is PXF, which has $543.7 million in AUM, has significant eurozone exposure through a combined 27 percent allocation to France, Germany, Italy and Spain. Perhaps another selling point with PXF is that the ETF offers exposure to four AAA-rated countries those being Germany, Canada, Australia and Switzerland.
PXF tracks the FTSE RAFI Developed Markets ex-U.S. Index, which selects constituents based on book value, cash flow, sales and dividends. Stocks are then weighted by their fundamental scores and the result is a top-10 lineup that includes BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS-A) and Vodafone (NYSE: VOD). BP is the ETF's largest holding with an allocation of just 1.91 percent. PXF, which has an annual expense ratio of 0.45 percent, is up 8.8 percent year-to-date.
PowerShares FTSE RAFI US 1000 Portfolio (NYSE: PRF)
The PowerShares FTSE RAFI US 1000 Portfolio competes with the cap-weighted iShares Russell 1000 Index Fund (NYSE: IWB), a massive $7.6 billion ETF that has surged 15.5 percent year-to-date. That would imply challenging IWB is difficult. Well, PRF is no slouch with over $1.8 billion in AUM and a return of 17.3 percent this year.
PRF tracks the FTSE RAFI US 1000 Index, which like the index tracked by PXF, weighs and scores constituents based on book value, cash flow, sales and dividends. That is an important factor for investors to consider because year-to-date, over the past year, the past three years and past five years, the FTSE RAFI US 1000 Index has outperformed the Russell 1000 and the S&P 500, according to PowerShares data.
Eight of PRF's top-10 holdings are Dow components with Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) the outliers. Financial services is by far the largest sector weight at 21.5 percent, but energy, technology, staples, discretionary, industrials and health care all receive double-digit allocations. Exxon Mobil (NYSE: XOM), Bank of America (NYSE: BAC) and AT&T (NYSE: T) are the only stocks in PRF with weights above two percent. PRF has annual fees of 0.39 percent.
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