The Appeal Of First-Gen Smart Beta
However, CFRA Research thinks some smart-beta products that launched between 2003 and 2008 also have many favorable traits. In ranking approximately 1,000 equity ETFs, CFRA combines holdings-level analysis with ETF attributes.
To us, whether the stocks inside the fund are appealing on a valuation and/or risk perspective and the cost implications of buying and selling the product matter more than its historical track record. Unlike actively managed mutual funds, index-based products are seeking to replicate, not outperform, a benchmark, making a three-year relative performance less meaningful.
The Guggenheim S&P 500 Equal Weight (RSP) launched in 2003 and has $13 billion in assets. The stocks inside this ETF are the same as can be found in SPY. Yet rather than being dominated by the biggest companies such as Apple, Microsoft, Amazon, Facebook and Johnson & Johnson—all strong stocks on a valuation and/or risk perspective to CFRA—RSP holds a similar weighting in all S&P 500 constituents.
These include more moderately sized ConocoPhillips, Darden Restaurants and Marriot International, all CFRA buy recommendations. RSP has a 0.40% net expense ratio.
The PowerShares FTSE RAFI 1000 Portfolio (PRF) came to market in 2005 and has approximately $5 billion in assets. PRF is constructed based on book value, cash flow, sales and dividends, weighted annually by these fundamental attributes. Exxon Mobil was recently the largest position, ahead of Apple, and is followed in size by Chevron and JPMorgan Chase.
The portfolio is viewed favorably by CFRA for the valuation of its holdings in addition to holding companies with favorable S&P Global Credit Ratings. PRF has a 0.39% net expense ratio.
WisdomTree & Oppenheimer Offerings
The WisdomTree LargeCap Dividend Fund (DLN) launched in 2006 and has approximately $2 billion in assets. DLN tracks a proprietary index of 300 large-cap dividend-paying companies and is weighted annually to reflect cash dividends. While Apple and Microsoft are the two largest holdings, AT&T and Procter & Gamble are also recent top-10 holdings; nondividend payers Amazon and Facebook are not in the portfolio.
CFRA views the stocks inside as appealing from a risk considerations perspective aided by the consistent earnings and dividend record of the holdings and the strong credit ratings of the parent companies. Furthermore, we think many of the stocks have attractive valuations. DLN has a 0.28% net expense ratio.
The Oppenheimer Large Cap Revenue (RWL) also holds the same stocks in the S&P 500 Index as SPY, but is constructed based on revenues of the constituents, rebalanced quarterly, and not market cap.