Greater Education Needed to Keep Up with ETF Innovation | ETF Trends

Graham Tuckwell, Founder and Chairman of ETF Securities, joined Tom Lydon, ETF Trends Publisher, at the Inside ETFs conference in Hollywood, Florida to discuss the innovations and growth in the Exchange Traded Fund business.

As the industry matures, products are growing more sophisticated and ETF providers should be active in educating investors about the proper usage of the fund products, especially with more people looking to the investment vehicle, Tuckwell said.

For example, Zacks and ETF Securities have partnered to provide the ETFS Zacks Earnings Large-Cap U.S. Index Fund (NYSEArca: ZLRG) and the ETFS Zacks Earnings Small-Cap U.S. Index Fund (NYSEArca: ZSML), two alpha focused generating ETF methodologies.

ZRLG and ZSML target four factors that stock holdings are rated on: The extent at which all analysts are revising earnings estimates; the size by which the consensus has changed; the difference between the most accurate estimate and consensus estimate; lastly, the few quarters of EPS surprise.

The ETFs’ components are selected based on Zacks Quality, which refers to the amount of non-cash components, or accruals, in each company’s reported earnings – only 10% of firms with the lowest sector-adjusted accruals are eligible for inclusion.

After accounting for the earnings estimates and quality, the component picks are controlled for risk exposure by diversifying across sectors.