As markets shift and volatility rises, advisors are faced with new challenges in generating alpha for clients. Ideas and strategies that were once winners could become laggards in today’s market environment, but a new crop of intelligent index exchange traded funds can help advisors solve the alpha conundrum.
By employing multiple investment factors rather than isolating just one, some new ETFs can give advisors advantages beyond those offered with traditional market capitalization-weighted funds. Traditional market-cap-weighted indices may be top heavy and overweight stocks and sectors that have been outpeforming. During a market collapse, these same areas will likely be the hardest hit, dragging on market-cap-weighted fund.
Scheduled for Tuesday May 19 at 2PM Eastern time, the upcoming webcast Rethinking Alpha: New Avenues to Portfolio Enrichment will highlight, among other issues, the advantages of quantitative screening, the importance of sector construction within benchmarks and how the Zacks equal-weight methodology is a beneficial departure from what advisors already know about equal weighting.
Zacks Investment Research Director of Quantitative Modeling Mitch Zacks and ETF Securities head of U.S. research Mike McGlone will join ETF Trends publisher Tom Lydon to explore the details of factor screening, how sector construction impacts risk management and how Zacks combines quantitative and qualitative analysis in ETFs. [These Smart Beta ETFs Break the Mold]
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) not only equally weight component stocks, but the two relatively new ETFs also equally weight sectors in an attempt to help provide greater diversification and better returns. [ETF Securities Expands Equity ETF Lineup With Two More New Funds]
ZLRG tracks the Zacks Earnings Large-Cap U.S. Index, which is home to 142 stocks. That index selects companies using a quantitative model followed by qualitative analysis. Only the top 5% of stocks ranked “Strong Buy” are eligible for inclusion. The index had annualized volatility of 14.7% and a Sharpe ratio of 2.1 at the end of last year, according to ETF Securities data.
ZSML, the small-cap offering, is benchmarked to the Zacks Earnings Small-Cap U.S. Index, which uses the same quantitative then qualitative approach as its large-cap counterpart. That index is home to 139 stocks.
Since coming to market in January, ZSML is up 7.7%, easily ahead of the most widely followed small-cap benchmarks over that period. Home to 142 stocks, ZLRG’s underlying index, the Zacks Earnings Large-Cap U.S. Index, “selects stocks based on the analysis of their earnings first using a quantitative model, Zacks Rank, then a qualitative approach, Zacks Quality,” according to ETF Securities.
Then Zacks “reviews the amount of non-cash components, known as accruals, included in each company’s reported earnings. Only the 10% of firms with the lowest sector-adjusted accruals are eligible.”
ZLRG is up 2.4% since inceptiom.
Advisors interested in attending the Tuesday May 19 webcast at 2PM Eastern time can register here.