Daily ETF Watch: ‘Knowledge Leaders’ Funds

Exchange Traded Concepts, the Oklahoma City-based firm that helps other firms launch exchange-traded funds, this week filed to market a pair of “smart beta” funds of sorts that target emerging and developed-market stocks. The indexes, from a firm called GaveKal, target companies based on variables like capital expenditures and employee resources.

The two proposed funds are:

• GaveKal Knowledge Leaders Developed World ETF
• GaveKal Knowledge Leaders Emerging Markets ETF

The securities-selection processes for both funds are based on “observable” intangible investments such as spending on things like advertising and R&D, and on “non-observable” intangible assets like employee resources, according to the prospectus.

MSCI indexes are the starting points for identifying constituents in either funds—specifically the MSCI Emerging Markets Index and the MSCI World Index, the filing said.

Not Your Normal Beta

This finely tuned indexing methodology from GaveKal may not be “smart beta” in the sense that the ETF market is coming to understand that term; namely, factors such as value, small size and momentum. That said, the two proposed funds fit into a broader trend of index ETFs that are moving away from “pure beta” cap-weighted indexes and toward alternative weighting mechanism.

The process relies on financial data that goes back as far as 1980 to arrive at a valuation based on intangible assets, and companies must pass a series of related screens in order to qualify as a “Knowledge Leader” index component.

The underlying indexes are equal-weighted.

The prospectus warns that the emerging markets fund has significant concentrations in Brazil, China, India, Korea and Taiwan, while the developed markets fund has high concentrations in the U.S. and Japan.

Penserra Capital Management is listed as the subadvisor to the funds. The filing didn’t include tickers or expense ratios, and it did not mention a listing exchange.