Daily ETF Watch: Elkhorn Plans RAFI Funds

Elkhorn files for income ETFs that rely on Research Affiliates' fundamentally weighted methodology.

Reviewed by: Heather Bell
Edited by: Heather Bell

The most recent filing from Elkhorn Investments provides details on a reunion of sorts, as it outlines plans to launch three funds based on indexes from a partnership between FTSE and Research Affiliates. Ben Fulton, Elkhorn’s founder, previously headed up Invesco PowerShares, which offers a full suite of products based on Research Affiliates’ Fundamental Index methodology and the FTSE RAFI benchmarks.

The three proposed funds are designed to capture the performance of stocks exhibiting high dividends and sustainable income; they include the following:

  • Elkhorn RAFI U.S. Equity Income ETF
  • Elkhorn RAFI Developed ex-U.S. Equity Income ETF
  • Elkhorn RAFI Emerging Equity Income ETF

In a multipart process described in the prospectus, the methodology selects its components by scoring them on their 12-month return on assets, cash flow to short-term debt and net operating assets, and excludes all companies that fall into the bottom 20 percent of the rankings for any of the three metrics. Then the companies left in the pool are ranked based on their 12-month yield, with all the companies falling below the median ranking eliminated from the selection universe.

From there, the methodology weights the components based on their respective FTSE RAFI Equity Income Factors, or rather their fundamental weight multiplied by their dividend yield. The fundamental weight of each company is a composite score based on their sales, cash flow, book value and dividend distributions. Liquidity also plays a role in the weighting of individual constituents, and individual company weights are capped at 5 percent, with no company weighted less than 0.1 percent, the prospectus says.

All three funds cover the small-, mid- and large-cap segments. The U.S. fund’s index covered 157 stocks as of June, while the developed-markets ETF and the emerging market ETF’s indexes cover 185 and 180 stocks, respectively.

The filing did not include tickers, expense ratios or a listing exchange.

Contact Heather Bell at [email protected].

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.