Exchange traded funds have taken the financial industry by storm, experiencing phenomenal growth in the fund space. Many investors now consider ETFs as a valid replacement for traditional open-end mutual funds as strategies evolve.
On the upcoming webcast this Wednesday, ETFs vs Mutual Funds: What’s the Difference?*, Steven Vannelli, CEO and CIO of Gavekal Capital, will delve into the ETF investment vehicle and look at the potential benefits of the relatively new investment tool.
As the passive, cost-efficient and transparent ETF investment tool gains prominence over traditional actively managed mutual fund products, more investors are looking to how far ETF providers can push the boundaries of index-based strategies, which has given rise to rules-based smart beta ETFs that passively track customized indices based on actively managed styles.
For example, the Gavekal Knowledge Leaders Developed World ETF (NYSEArca: KLDW) is the first exchange traded fund based on the so-called Knowledge Effect.
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.