15 Of 425 US Equity ETFs Earning Alpha

15 Of 425 US Equity ETFs Earning Alpha

A first-half roundup of risk-adjusted outperformance—and underperformance—for U.S. equity ETFs.

Senior ETF Specialist
Reviewed by: Paul Britt
Edited by: Paul Britt

A first-half roundup of risk-adjusted outperformance—and underperformance—for U.S. equity ETFs.

Midway through 2014, snapshot lists are popping up summarizing best and worst performers to date. ETF.com is no exception, with links to best- and worst-performing ETFs so far.

These lists measure returns—what you would have made if you bought on date X and sold on date Y.

The other way to think about outperformance is risk-adjusted returns, also known as “alpha.” Alpha is a relative concept in that it requires comparison—outperformance relative to what, in other words.

At ETF.com, we compare each ETF’s performance with a benchmark that’s pretty darn specific yet plain vanilla. For a small-cap value ETF, for example, we’ll use a plain-vanilla small-cap value benchmark. The benchmark can be thought of as “the market” for that fund’s particular space.

Alpha accounts for the risk that the ETF takes relative to the market. If the ETF takes a lot more risk by loading up on small-caps or on volatile stocks, for example, it might not earn alpha even if its returns are higher than the market.

Most funds don’t produce alpha at all—or at least alpha that’s statistically significant. In the 425 U.S. equity ETFs (with one year of history; excluding leveraged and inverse securities), only 24 had alpha, and nine of these were for underperformance. Alpha does cut both ways, after all.

Following is the list of funds with alpha at the midyear point. I’m using a one-year look-back here, not six months, so this snapshot includes the second half of 2013.

Alpha table


Each entry is worthy of its own blog, but instead I’ll just touch on a few funds that jumped out at me.

The Guggenheim S&P 500 Pure Value ETF (RPV | A-63) tops the list. The “pure” in the fund’s name means that it hews strictly to the value side of the style spectrum, ignoring middling stocks with a tinge of growth in them. I sang RPV’s praises recently, but also noted that the fund got absolutely crushed in the worst of the financial crisis. RPV’s huge alpha means that it’s beating its large-cap-value benchmark—not the S&P 500, necessarily—on a risk-adjusted basis.

At the other extreme is the SPDR S&P Oil & Gas Equipment & Services ETF (XES | A-44). The equal-weighted fund lags a market-cap-weighted oil and gas benchmark. Equal weighting adds diversification, but effects on returns can be dramatic and aren’t always good.

Lastly, note the broad market funds in the middle of the alpha table. How can a fund like the Vanguard Total Stock Market ETF (VTI | A-100) beat the market? Surely it is the market. The explanation? VTI shows small but statistically significant alpha because it aligns extremely well with our broad MSCI benchmark, yet has eked out a bit more return.

Contrast that with the negative alpha shown for another fund often associated with the broad market, the SPDR Dow Jones Industrial Average Trust (DIA | A-72). DIA’s odd construction has hurt it recently despite decent performance in the industrial sector that dominates its portfolio.

Takeaways? First: Alpha is an alternative to simple outperformance when comparing funds. Second: Alpha is rare but it does exist. Third: Alpha, like simple outperformance, can be fleeting.

See the ETF.com fund reports for more information. Alpha appears on the performance statistics corner of the Fit tab only when it’s significant.



At the time this article was written, the author held a long position in VTI. Contact Paul Britt at [email protected] or follow him on Twitter @PaulBritt_ETF.


Paul Britt, CFA, is a senior analyst in the ETF Analytics group at FactSet, a team that maintains and develops an industry-leading suite of ETF-related data and analytics products. Prior to joining FactSet in April 2015, he was a senior analyst at etf.com, where he performed a similar role, and worked in private placement at Pensco Trust. Paul holds a B.S. from RIT and an M.S. in financial analysis from the University of San Francisco.