Friday, March 1, 2013

As the ETF world debates the merits of actively managed versus passive funds, the new smart beta space is growing right in front of their eyes.  The term refers to funds that select their holdings, usually by way of a quantitative model, on a periodic basis and hold them through the period until the next selection date.    Some of these funds have been very successful in gathering assets and growing them nicely and two of them are in today’s top 10.  The Powershares XTF: Dynamic Market Portfolio ETF (PWC) and the Powershares Dynamic LargeCap Growth ETF (PWB) are in 7th and 8th place this morning.

Both funds had their quarterly selections in February and Quant likes the new holdings. PWC’s new portfolio is weighted towards energy and technology and we know Quant has been looking favorably on those sectors lately.  Its’ next two largest sector holdings are in financials and consumer discretionary which have not been populating the upper ranks of late but have also been attractive enough to comprise two of PWBs top three sectors with technology rounding out that last third.  Quant isn't the only one who likes them as their middling sentiment scores in the 50s reflect scant bearishness towards both funds.  That usually means the technical measures come in better and low 70s scores in that category for each are very decent.  It’s their Fundamental Scores in the 90s that account for their positions in today’s top 10 as they are the second and third best in that category.  The last reconstitution in November did better for PWC than for PWB and aside from validating the merits of the model that doesn't matter much now with their new holdings.  In fact, the lagging PWB has the distinction of earning today’s sole 10 Green Diamond Reward Rating, but PWC is no slouch with a 9.78.  Both funds also confirm Quant’s low risk focus with PWC coming in at 4.01 Red Diamonds but PWB much lower at 2.29 which is a risk number typical of bond funds.

We must admit to having a fondness for these funds as we are obviously believers in the quantitative method of investing; but you can rest assured that our Quant model has no such bias which is the whole point of quantitative investing.  Now that ETFGsm has launched our own smart beta indices it will be nice to see how these funds perform against them.  If our indices ever lead to products you won’t see them rank highly however as they would be ETFs of ETFs which do not get scored in our model.  In case you were wondering, that is why you don’t see many of the other smart beta products in our rankings (that and the fact that most of the others are mixed asset classes which also do not get scored in Quant.)  If you are not ready to commit assets to the smart beta space, we suggest you at least keep your eye on these funds and meanwhile keep the other eye on our smart beta indices.  As other sites debate trends that may happen, the smart beta trend is thriving.  Thank you for helping us thrive and have a nice weekend.

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