Fans of baseball know there are two main ways to evaluate team and individual performance: the old-school “eyeball test” method and the newer practice of statistical analytics, popularized in the book (and later the film) “Moneyball.”
An analogous distinction can be drawn between ordinary exchange-traded funds (ETFs) and so-called “smart beta” ETFs. A typical ETF weights its holdings based on market capitalization, while a smart beta fund is weighted according to less visible, though still important, criteria. An example of a smart beta fund that uses the most critically important data to paint a picture of overall quality is PowerShares FTSE RAFI US 1000 ETF (PRF).
PRF’s performance matches that of an index composed of approximately 1,000 stocks screened for quality by Research Affiliates, based on four fundamental measures: book value, cash flow, sales and dividends.
This strategy appears to be paying off. This ETF delivered a whopping 32.85% gain in 2013 and is ahead 6.00% so far this year. PRF also offers a yield of 1.51% by distributing quarterly dividends to shareholders.
With its 1,000 holdings, it makes sense that PRF is invested in a wide variety of sectors. Leading the way are financial services, 17.79%; energy, 12.99%; technology, 11.43%; industrials, 11.08%; and healthcare, 10.95%, among many others. This fund’s top 10 held positions are all names recognizable by the common investor and make up 17.61% of PRF’s total assets. The top five of these companies are Exxon Mobil Corporation (XOM), 2.95%; Chevron Corporation (CVX), 2.16%; AT&T Inc. (T), 2.00%; JP Morgan Chase & Co. (JPM), 1.73%; and General Electric Company (GE), 1.72%.
When you invest, you have two options with ETFs: go with the crowd through market capitalization, or trust financial experts’ evaluation of quality based on their experience and knowledge. PowerShares FTSE RAFI US 1000 ETF (PRF) follows the latter path, letting the numbers guide its weighting. If you like to invest using statistical analysis, you may want to consider this fund.
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please check out my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.
In case you missed it, I encourage you to read my e-letter column from last week about a revenue-centered smart beta ETF. I also invite you to comment in the space provided below.