This shows that KNOW seems to have the opportunity to grow more than the broad-based market-cap-weighted ETFs when you look at the price to sales and price to book ratios.
The price to earnings is in line with SPY, and lower than the other corresponding ETFs, although this ratio is subject to a higher-degree accounting judgment when posting a company’s earnings. Price relative to sales and book value have a lower opportunity for such judgments. They may present a more reliable picture of the fundamentals. KNOW also has the highest yield compared with these ETFs.
Investors should ask themselves, if the correlations are so high, why has KNOW outperformed these other benchmark ETFs? Evaluate the overlap.
We define “overlap” as the percentage of the ETF that is contained or represented by an ETF to which it is being compared. There is a 12% overlap between KNOW and SPY, an 11% overlap between KNOW and VTI, and an 11% overlap between KNOW and ITOT. The index methodology behind SRQAM and KNOW has systematically chosen securities that have a high correlation to traditional indexing with a portfolio that is 88% different.
In the world of active management, the phenomenon of high correlation and low overlap is called “positive active-share.” This high level of active-share could explain the large positive performance divergence relative to these widely used broad-based ETFs.
One of the key benefits of business-characteristic ETFs is their tax efficiency. According to Morningstar, the annualized turnover of KNOW is 827%, which would generally result in significant capital gains distributions to shareholders of a mutual fund.
However, the unique ability of an ETF to create and redeem shares allows for the distributed capital gains to be minimized significantly. So far, KNOW has distributed capital gains only in one year—2012—when it distributed $1.54 in short-term gains, or about 3%. No capital gains were distributed in 2013, 2014 or 2015.
The Bottom Line
As noted on ETF.com, KNOW has been the best-performing “alpha seeking” ETF for two years, and there is evidence to suggest this positive relative performance can continue. The fundamentals of KNOW, relative to certain broad-based market-cap-weighted ETFs, and are generally considered a better investment opportunity to the “growth at a reasonable price” investor.
The high level of active-share generated by the SBQAM Index makes KNOW an attractive ETF for diversifying core U.S. equity exposure. The tax efficiency of the ETF allow the investor to retain exposure to a series of companies that meet its selection criteria and avoid massive capital gains as the fund holdings turns over. With this ETF, I intend to “stay in the know.”
At the time of this writing, Toroso had positions in KNOW. Toroso is affiliated with Global X Management Company. Toroso is a New York-based investment advisor focused on researching ETFs and other exchange-traded products, and designing asset allocation strategies, using ETFs that seek to perform well in various economic climates while emphasizing future objectives over past correlations. For more information about Toroso, call 646-465-5930, visit www.torosoinv.com or email [email protected]. For a list of relevant disclosures, please click here