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. According to Gavekal, this would deprive investors of relevant information on knowledge-driven expenditures.

The knowledge effects parameters may help investors target more healthier segments of the market. For instance, emerging market funds are dominated by market capitalization weighting schemes. Consequently, cap-weighted emerging market funds are heavy on state-owned companies and sectors, which may not benefit as much from increased infrastructure spending, rising commodity prices, a depreciating U.S. dollar or falling rates, among other factors.

Consequently, KLEM takes a larger position in areas like technology 23.7% and consumer discretionary 23.2% that benefit from the expanding emerging markets. Meanwhile, the ETF’s state-owned exposure to areas like energy, financials and utilities make up less than 2% of the portfolio.

Financial advisors who are interested in learning more about the benefits and shortcomings of smart beta ETF strategies can register for the Tuesday, March 22 webcast here.