Transparent Value Advisors, a company that has partnered with Dow Jones indexes to create fundamentally focused benchmarks, filed paperwork with the Securities and Exchange Commission to earn the right to market its own actively managed ETFs focused mostly on large-cap U.S. equities.
The “exemptive relief” filing, which Transparent Value made with ALPS Distributors, contemplates the launch of at least seven funds using the security-picking methodology of the Dow Jones RBP indexes. Dow Jones partners with Transparent Value on the calculation and construction of the indexes. For its part, Transparent Value calculates the various parameters used in the RBP, or “required business performance,” methodology.
The seven initial ETFs detailed in the filing include:
- Transparent Value Dow Jones RBP U.S. Large-Cap Aggressive Index ETF
- Transparent Value Dow Jones RBP U.S. Large-Cap Core Index ETF
- Transparent Value Dow Jones RBP U.S. Large-Cap Defensive Index ETF
- Transparent Value Dow Jones RBP U.S. Dividend Index ETF
- Transparent Value Dow Jones RBP U.S. Large-Cap Growth ETF
- Transparent Value Dow Jones RBP U.S. Large-Cap Market Index ETF
- Transparent Value Dow Jones RBP U.S. Large-Cap Value ETF
While the filing stipulates actively managed ETFs, each of the proposed funds is based on a Dow Jones RBP index with a name similar to the respective ETFs. In the filing, Transparent Value called the indexes “a family of quantitative strategy indexes offered by Dow Jones Indexes using rules-based analytics supplied by Transparent Value, LLC.”
The fact that so-called active funds are built on exquisitely calibrated indexes speaks to how widespread the trend toward so-called fundamental indexing made famous by Rob Arnott of Research Affiliates has become. Indeed, some ETF industry sources consider indexes that screen for variables such as earnings or revenue to be clear, if rules-based, cousins of traditional stock picking.
The RBP Methodology
The filing said Transparent Value entered into a limited exclusive arrangement with Dow Jones Indexes to use the Dow Jones RBP Indexes as the benchmarks for the initial funds, and pays a licensing fee to Dow Jones Indexes for that use.
The DJ U.S. RBP Indexes methodology assigns each company in the Dow Jones U.S. Large-Cap Index a required business performance probability.
A company's RBP is based on its discounted cash flow (DCF) and its stock price. Basically, Transparent Value's methodology determines how much in revenues a company would have to generate to justify its stock price.
From there, Transparent Value calculates the company's likelihood of achieving its RBP, basing the probability on historical and projected data.
Exemptive relief grants firms exceptions to certain sections of the Investment Company Act of 1940, and obtaining it is the first step companies must take to earn the right to market ETFs. It often takes anywhere from six to nine months for a company's first ETF to come to market after it has filed for exemptive relief.
ALPS is serving as the distributor of any funds brought to market under the exemptive relief the companies are seeking.
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