Wednesday, March 6, 2013

Woe is the algorithm trying to beat the world leading S&P 500 in 2013.  Quant doesn't feel pain though, it just calculates which equity ETFs have the characteristics common to funds that outperform the rest.  Today it has set its sights on 4 smart beta funds in or near the top 10.  The 6th place Powershares Buyback Achievers Fund (PKW) is new to the top ranks but their 7th place Powershares XTF: Dynamic Market Portfolio (PWC) is familiar, as are the 10th and 11th place Powershares XTF: Dynamic OTC Portfolio (PWO) and the Powershares Dynamic MagniQuant Fund (PIQ). 

All four represent the burgeoning smart beta category where the portfolio changes periodically and all four are beating the S&P 500 year to date.  The newly elite PKW buys US companies that have repurchased at least 5% of their outstanding shares for the trailing twelve months.  It is unlike the others in that its portfolio is reconstituted annually with quarterly rebalancing.  The other three have quarterly reconstitutions that select companies from their respective markets that show superior risk reward characteristics.  Quant agrees with their model today giving all four more than 9 Green Reward Diamonds with less than 4 Red Risk Diamonds, PWO is today’s sole ETFGsm 10 Green Diamond fund.  Since they are all ahead of the market YTD, it is not surprising to see their strong technical scores combined with middling sentiment scores.  Not many investors want to stand in front of moving trains in this market so short interest and put activity are low for the group which helps explain their also low implied volatility.  What is surprising is that funds that have performed so well are still trading so inexpensively, all four have very strong Fundamental Scores near 90.

As our competitors debate the active vs. passive issue, smart beta is stealing the show.  Fear not the new, these funds are not as complex as their names suggests and with the help of ETFGsm you can see everything the funds hold, simple equities with no derivatives or swaps.  That’s a much more transparent box than your typical open end mutual fund.  So when your clients want to beat the world leading S&P 500 where can you turn?  Quant says these smart beta funds will get the job done over the next few months.

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