Market Overview

An Outperforming Developed Markets ETF

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An Outperforming Developed Markets ETF
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There must be something to the knowledge effect. Just look at the Gavekal Knowledge Leaders Developed World ETF (Exchange Listed Funds Trust GaveKal Knowledge Leaders (NYSE: KLDW)). Now nearly 13 months old, KLDW topped the MSCI World Index by 5.5 percent through July 31, according to issuer data.

“KLDW’s 1-year risk-adjusted performance illustrates Knowledge Leaders’ tendency to deliver excess returns while also falling less during periods of market weakness. For example, KLDW delivered greater total return and alpha than all six of the top benchmark indexes tracked by the largest international core equity ETFs over 1-year, as of 7/31/2016,” according to a statement issued by Denver-based Gavekal Capital.

Digging Deeper Into KLDW

KLDW follows the Gavekal Knowledge Leaders Developed World Index (KNLG), an equal-weight index that at the geographic level is fairly evenly split between North American, EMEA and developed Asian countries.

Related Link: Old Reliable Among Emerging Markets ETFs

“The knowledge effect’s roots can be traced back to the early 1970s when the first semiconductor became commercially available and a 1974 mandate by the Financial Accounting Standards Board (FASB), which ruled companies must expense knowledge investments in the period those expenses were incurred. As Gavekal notes, that deprives investors of relevant information on knowledge-driven expenditures,” according to ETF Trends.

Consumer discretionary and technology stocks combine for over 40 percent of KLDW's weight while industrial and healthcare names combine for a third of the ETF's weight.

“The Knowledge Effect is grounded in academic literature. It was first discovered in a series of studies in the 1990s where NYU’s Baruch Lev analyzed 20 years of financial data and discovered an association between a firm’s level of knowledge capital and its subsequent stock performance. Further research advanced the findings, and in 2005, Lev proved the existence of a market inefficiency attributable to missing information about corporate knowledge investments. This phenomenon leads highly innovative companies to deliver persistent abnormal returns,” according to Gavekal.

In the year ended July 31, KLDW also offered investors a lower maximum drawdown compared to the six most widely equity indexes tracked by popular ETFs.

Top Holdings

KLDW's top 10 holdings include familiar U.S. names such as:

  • Apple Inc. (NASDAQ: AAPL).
  • AT&T Inc. (NYSE: T).
  • The Coca-Cola Co (NYSE: KO).
  • Facebook Inc (NASDAQ: FB).

The return on equity of KLDW's member firms is close to 13 percent while the return on invested capital is nearly 14 percent, according to issuer data.

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