8 ‘Smart Beta’ ETFs That Cut Unique Paths

June 16, 2015

[Editor's Note: "PowerShares International BuyBack Achievers Portfolio" has been corrected to "PowerShares BuyBack Achievers Portfolio."]

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article, the third in a three-part series about “smart beta,” is by John Eckstein, chief investment officer and director of research at Astor Investment Management.

This is my third note on "smart beta" funds. This time, I’ll look at those funds that ETF.com classifies as "alpha seeking." Despite the fact that "alpha-seeking beta funds" is internally inconsistent, we’ll ignore linguistic niceties and see what these funds have to offer.

These are funds that select stocks based on a well-defined methodology that we hope will outperform passive indexes with either capitalization or factor weights. As most other ETFs have been devoted to replicating indexes, this is a much smaller universe.

Specifically, this third and final look at smart-beta ETFs will focus on the strategies that don’t fit neatly into any other categories I explored in the first two installments. In the first installment, I looked at dividend-focused funds, and in part II, I looked at nondividend smart-beta strategies.

I’m talking about funds like the PowerShares S&P 500 Downside Hedged Portfolio (PHDG | B-44): strategies organized around the VIX volatility index, or equity strategies organized with options overlays.

But before pushing onward, I’ll remind readers that my previous columns on smart-beta ETFs were hedged with warnings about extrapolating from backtests, and as far as that goes, I need to repeat myself here.

Setting Up The Comparisons

We only have index histories extending beyond the ETFs for six of our funds, but in five of six instances, the alpha after the index was defined is below the alpha for the index over its simulation period, adjusted for the ETF's fees.

The beta delivered seems to be about what was simulated on average. My conclusion is that investors should place as much emphasis on the economic rationale behind the funds as the performance, live or simulated. 

So, I selected just eight of the larger funds from the list of alpha-seeking ETFs on the ETF.com site. The table below shows the period from 2001 and 2010, to-date. The data here are based on the indexes underlying the strategies, but they are also adjusted for the current fees of the ETFs. Only four of the indexes go back to 2001. 

  1/2001 - 5/2015   1/2010 - 5/2015      
  Compund Annualized   Compund Annualized      
FPX 9% 0.46 -52%   20% 1.22   June 2005 IPOs
PBP 3% 0.28 -36%   7% 0.70   April 2002 Option writing
PKW 12% 0.79 -50%   19% 1.38   Dec. 2006 Buyback
CSD         20% 1.24   June 2006 Spinoffs
GURU         16% 0.97   June 2012 Track hedge funds
MOAT         15% 0.88   June 2012 Wide moat
PDP         17% 1.10   March 2007 Momentum
PHDG         7% 0.78   Nov. 2009 Buys VIX futures
S&P 500 5% 0.35 -51%   15% 1.11      

Alpha-seeking ETFs, performance of index tracked by funds, adjusted for ETF fees. Sources: Bloomberg, ETF.com, Astor calculations.

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