Companies that continuously innovate succeed. Those that don’t risk falling by the wayside. Of course, legitimate innovators are spending capital to increase their knowledge potency, but due to some old accounting rules, companies that spend heavily on things such as research and development do not always get the credit they deserve from the investment community.

That can create some compelling scenarios with undervalued stocks and Denver-based Gavekal Capital looks to unearth those names in the Gavekal Knowledge Leaders Developed World ETF (NYSEArca: KLDW) and the Gavekal Knowledge Leaders Emerging Markets ETF (NYSEArca: KLEM), both of which last week.

“Both ETFs are designed to capitalize on the Knowledge Effect, the tendency of highly innovative companies to experience excess returns in the stock market. KLDW offers core exposure to developed world equities, and KLEM offers core exposure to diversified emerging markets equities,” according to a statement from Gavekal.

The firm’s two knowledge leaders funds are the first ETFs to focus directly on the knowledge effect. The knowledge effect’s roots can be traced back to the early 1970s when the first semiconductor became commercially available and a 1974 mandate by the Financial Accounting Standards Board (FASB), which ruled companies must expense knowledge investments in the period those expenses were incurred. As Gavekal notes, that deprives investors of relevant information on knowledge-driven expenditures.

KLDW tracks the Gavekal Knowledge Leaders Developed World Index (KNLG), an equal-weight index that is home to only developed world companies. The index allocates 39% of its weight to North American companies with another 34.5% devoted to Asian firms. [Gavekal Primes Knowledge Leaders ETFs]

“Decades of academic research suggest an association between highly innovative companies and excess stock returns. We aim to transform those excess returns into portfolio alpha in a strategic beta ETF,” said Steven Vannelli, chief investment officer at Gavekal Capital, in an email exchange with ETF Trends.

Vannelli manages $600 million in knowledge leaders strategies, including ETFs, separately managed accounts and a mutual fund.

KLDW’s bellwether holdings include familiar names such as Dow components Apple (NasdaqGS: AAPL), General Electric (NYSE: GE) and Microsoft (NasdaqGS: MSFT) as well as Google (NasdaqGS: GOOG) and Honda Motor (NYSE: HMC). [Smart Beta ETFs Keep Gaining Traction]

“The Gavekal Knowledge Leaders ETFs are the first and only high active share strategic beta ETFs to offer exposure to an internationally diversified group of the world most  innovative companies,” adds Vannelli.

KLDW charges 0.75% per year.

Charts Courtesy: Gavekal Capital

Do NOT follow this link or you will be banned from the site!