Specialized Equity Strategies
I also want to highlight two strategies that pick stocks according to criteria completely unrelated to familiar capitalization-based indexes.
The PowerShares BuyBack Achievers Portfolio (PKW | B-95) is based on the Portfolio Nasdaq US BuyBack Achievers Index. This ETF invests in companies that have been making significant buybacks. This strategy ends up selecting stocks that would score well on multiple screening factors.
That means not just attractively valued smaller stocks, but also those that are robustly profitable with conservative balance sheets. This buyback index—adjusted for fees of the ETF—has done quite well compared with the S&P 500 Index since 2001.
In some ways, you can consider the First Trust US IPO ETF (FPX | B-75) the evil twin of PKW, which nevertheless finds its own way to make money. FPX stock tracks an index of recent IPOs.
The companies that an investor can gain exposure to in this index are different than most other smart-beta funds in that the new companies listed these days tend to be over-leveraged, with less robust earnings history and somewhat overvalued compared with the market.
Despite these apparent handicaps, the index has outperformed the S&P 500 since 2001, and slightly beat it in risk-adjusted terms.
Overall, there are fewer alpha-seeking funds, and they have shorter histories than the value or dividend-based funds we reviewed in parts I and II of this series. However, since these funds are trying to do something different than all the other me-too ETFs launched every day, they deserve a careful look by investors.
At the time this article was written, the author’s firm did not own any of the securities mentioned.
Astor Investment Management is a money manager with an active and economically grounded approach to asset allocation. We believe investment opportunities arise based on the ability to identify fundamental trends and changes in the economy. We build portfolios of ETFs appropriate for our analysis of the business and monetary policy cycles. For more information, see www.astorim.com; for our blog, see www.astorinsights.com.