Daily ETF Watch: 2 ‘Innovation’ Funds Launch

Newcomer Gavekal and Compass EMP roll out ETFs.

Reviewed by: Heather Bell
Edited by: Heather Bell

Gavekal Capital is making its debut in the ETF space by launching its own contribution to “innovation”—the latest budding trend in ETFs. The Gavekal Capital “Knowledge Leaders” funds are part of the recent and growing focus on innovation that has been supported by the launch of ARK’s “disruptive innovation” funds and the iShares Exponential Technologies ETF (XT), among others.


The Gavekal Knowledge Leaders Developed World ETF (KLDW) and the Gavekal Knowledge Leaders Emerging Markets ETF (KLEM) were both developed to exploit the “knowledge effect,” which is based on the premise that the stocks of very innovative companies tend to outperform.


Gavekal traces the “knowledge effect” to two events: the sparking of the commercial semiconductor industry in 1970 that led to an exponential expansion of “knowledge production”; and the U.S. Financial Accounting Standards Board’s 1974 decision that said companies had to expense their knowledge investments in the period in which they were incurred.


According to Gavekal, this meant that investors were blocked from having information on a company’s knowledge spending right as the expansion in knowledge production was kicking off. The firm cites the research of Baruch Lev, of New York University, as the basis of the “knowledge effect’s” underlying argument.


Inside The ‘Innovative’ Indexes

The funds’ indexes seek to target this effect via a company’s intangible assets, defined in the prospectus as including “research and development, advertising, brand development, and employee training expenses.” Each company’s “intangible-adjusted financial history” is screened for things like “knowledge and innovation intensity, financial strength and profitability,” with those that pass the screens attaining the label of “Knowledge Leader.”


The underlying indexes are equal-weighted. At their most recent rebalancing, the emerging markets index had 196 components, while the developed-markets index had 682 components.


The prospectus notes that KLDW has significant allocations to the U.S. and Japan; KLEM, on the other hand, has sizable concentrations in Brazil, China, India, Korea and Taiwan.


More interestingly, however, is the fact that the prospectus notes that the emerging market fund has allocations to consumer discretionary, consumer staples, information technology and telecommunications, while the developed-market fund provides exposure to consumer discretionary, consumer staples, health care, industrials and information technology.


Penserra Capital Management is the fund’s subadvisor. Penserra also subadvises the PureFunds ISE Cyber Security ETF (HACK | C-23).


KLDW comes with an expense ratio of 0.75 percent, or $75 for each $10,000 invested, while KLEM charges 0.95 percent.



Compass EMP Adds To Lineup
Compass EMP, which launched its first five funds last year, has added three more funds to its growing family of volatility-weighted products.


The three funds are as follows:

  • Compass EMP US Large Cap High Dividend 100 Volatility Weighted Index ETF (CDL)
  • Compass EMP US Small Cap High Dividend 100 Volatility Weighted Index ETF (CSB)
  • Compass EMP US Small Cap 500 Volatility Weighted Index ETF (CSA)


Each comes with an expense ratio of 0.35 percent.


In the case of CDL and CSB, the funds track indexes that are 100-stock subsets of the broad 500-stock indexes for their respective size categories. The indexes cover the highest-dividend-yielding components in their parent indexes.


CSA, meanwhile, tracks the parent index of CSB’s benchmark. It covers stocks that have market capitalizations under $3 billion, with positive earnings for the prior four quarters. As in the case of all Compass EMP products, stocks are weighted inversely with regard to their volatility, so high-volatility stocks are given lower weightings and vice versa.



Heather Bell is a former managing editor of etf.com. She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.