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.