The index-based Knowledge Leaders ETFs select companies based on the innovation process and other criteria, including characteristics like intangible property as a percentage of assets, intangible investments as percentage of sales, gross margins, financial leverage, net debt as percentage of capital, operating cash flow margin, free cash flow margin and return on invested capital.
Through its screens, the Knowledge Leaders ETFs hold the largest concentration of passing companies in health care, technology and consumer sectors. On the other hand, the pass rate is lowest for companies in the financial, energy and utilities sectors. Moreover, the Knowledge Leaders portfolio shows a relatively high correlation to the small-size and quality factors, which help explain the outperformance in bull markets and lower drawdowns in bear markets, and the strategy exhibits relatively low correlation to momentum and low-volatility factors.
Through targeted screening methodologies, the recent surge of smart beta ETF strategies help investors gain exposure to traditional actively managed styles or factors in a cheap, transparent and cost-efficient investment vehicle.