There is mounting evidence some advisors are embracing so-called smart-beta exchange traded funds, or those ETFs that go beyond plain vanilla indexing to include strategies that are not focused entirely on market cap weighting.
In a roundtable discussion featured in the latest issue of Barron’s, Rod Smyth, chief investment strategist at RiverFront Investment Group, spoke favorably of several ETFs that are far from traditional, cap-weighted funds.
Smyth told Barron’s the PowerShares FTSE RAFI Emerging Markets Portfolio (NYSEArca: PXH) “gives you a tilt towards factors like book value and cash flow and bigger weightings to certain sectors, such as energy. If we happen to like a sector, we are going to want to buy a product favoring it rather than the vanilla ETF.”
PXH, which competes with funs such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), selects holdings based on book value, cash flow, sales and dividends. Home to 321 stocks, PXH has $371.2 million in assets under management. Brazil and China combine for 41% of PXH’s country weight. [Fundamental Indexing Quiets Critics]
Smyth said the PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio (NYSEArca: PXF) “gives us some extra cyclical exposure absent from the vanilla index.” The more than 1,000 components found in PXF are selected in similar fashion to PXH’s process.
The primarily large-cap PXF has allocates a combined 51% of its weight to Japan, the U.K. and France. In the past year, the FTSE RAFI Developed Markets ex-U.S. Index, PXF’s underlying index, has outpaced the MSCI EAFE Index by over 200 basis points and the S&P 500 by 550 basis points, according to PowerShares data.
Smart beta ETFs have been prolific gatherers of assets this year. As of the end of October, inflows to such ETFs topped $45 billion and more issuers, including Charles Schwab (NYSE: SCHW), are offering smart beta products. [Smart Beta ETFs See Significant Inflows]
PXF has hauled in $278.5 million this year, making it the tenth-best PowerShares ETF in terms of 2013 inflows. PXH has 2013 inflows of $18.3 million. The PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF) leads the PowerShares pure smart beta ETFs with year-to-date inflows of nearly $628 million.
PRF, which is primarily allocated to U.S. large-caps, uses the same methodology used by PXH and PXF. Six Dow components, including Exxon Mobil (NYSE: XOM) and J.P. Morgan Chase (NYSE: JPM), are found among PRF’s top-10 holdings.
PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio
ETF Trends editorial team contributed to this post.