Yesterday we highlighted a suite of ETFs known as RevenueShares that isolate known S&P market cap weighted indexes, and re-shuffle the underlying index members by top line reported revenues, owning all of the names in the S&P indexes but in different proportions.
Some would classify such an approach as “fundamental indexing” or even “quasi-active” depending in the exact criteria examined, which brings to light another index approach offered by PowerShares ETFs. PRF (PowerShares FTSE RAFI U.S. 1000 Portfolio) debuted in late 2005 and has impressively out-performed the S&P 500 Index benchmark since inception, +24.39% versus 12.75%. PRF tracks the FTSE RAFI 1000 index, which is constructed using the largest U.S. based equities but weighting individual constituents in the index according to four fundamental metrics of book value, cash flow, sales, and dividends.
On the basis of these metrics, those equities with the highest displayed fundamental strength are weighted the heaviest in the index. Likewise, PRFZ (PowerShares FTSE RAFI U.S. 1500 Small-Mid Portfolio), uses the same index inclusion criteria but the pool of available equities is across the small and mid cap equity universe.
Neither fund has been lost on institutional nor RIA ETF portfolio builders, as PRF has now attracted more than $1.4 billion in assets under management, while PRFZ has raised about $467 million. For comparison’s sake, one might look at the top ranked holdings in the market cap weighted S&P 500 index, AAPL (4.30%), XOM (3.19%), GE (1.75%), CVX (1.63%), and IBM (1.60%), compared to those of the FTSE RAFI U.S. 1000, XOM (3.17%), BAC (2.66%), GE (2.30%), T (2.27%), and C (1.93%).
It is rather notable to us that AAPL, the top weighted constituent in the S&P 500 Index in terms of market cap, is absent from the top ten individual holdings in PRF, and fundamentally based investors would likely argue that this is a display of AAPL’s stock price outpacing measurable company fundamentals such as the four that the RAFI strategy attempts to measure and isolate. Likewise, with PRFZ compared to U.S. Small and Mid Cap Indexes that are typically market cap weighted, portfolio managers will notice similar significant differences in terms of overall weightings to given names.
PowerShares FTSE RAFI U.S. 1000 Portfolio
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