An Advisor Explains Why He Owns PRF

One advisor explains why he owns the 'smart beta' fund PRF.

Reviewed by: Lara Crigger
Edited by: Lara Crigger

[This article originally appeared in our June issue of ETF Report.]


Tom Cartee, Senior Investment Advisor


Jim Clark

Firm: Sheets Smith Wealth Management
Location: Winston-Salem, NC
Founded: 1982
AUM: $740 Million
% OF AUM IN ETFs: 12%


When did you first invest in the PowerShares FTSE RAFI US 1000 (PRF | A-88), and what drew you to the fund?
In May 2006. The ETF launched in December 2005, so I was an early adopter. When I had the index methodology explained to me, I liked the idea. 
PRF is one of the earliest ETFs using an alternative weighting for index construction; it uses sales, cash flow, dividend and book value to calculate the weighting of the holdings in the index. 
There was almost a common-sense aspect to the fund I found appealing. Then, looking at the research Rob Arnott had done in constructing the index, I thought it was very intellectually rigorous as well. 
Do you use both market-cap and alternatively weighted equity ETFs in your portfolios?
I do. Fundamentally weighted indexes complement the market-cap-weighted ones. I may have up to 60% of an asset class in market cap and 40% in alternative weighting. 
Fundamentally weighted ETFs make up a pretty substantial minority then. 
Yes. Because although the markets are highly efficient, history has shown us that they’re not perfectly efficient. I lived through the tech bubble, I lived through this subprime tsunami, and it seems that at the extremes, the market can become overweighted in overvalued stocks. So an index that takes price out of weighting helps reduce the risk that, when the market hits extremes, you’ll be overweighted in the frothiest sectors. 
Were you concerned about PRF’s lack of track record when you first bought it? 
Even now, some investors remain skeptical about fundamentally weighted indexes.
I obviously was not afraid of a new ETF. For me, if something is systematic, transparent and rules-based, then my faith is in those rules and the sponsor behind them. If you get too much human intervention, then emotion can start to come in.
What downsides do you see to owning PRF?
You’ll pay a little more for these alternative weighting schemes. That’s one of the reasons I like to pair them with the more liquid, less expensive market cap.
There are advantages to using super-cheap market-cap ETFs, and some advantages to alternatively weighted ones. So why not use both? I don’t think it has to be either/or.
What would be the trigger for you to get out of PRF?
It’s not easy for me to devise a scenario. If PowerShares did something really strange as far as its structure, or if it raised the cost or something—but I think I’ll be in this for the long haul. It’s a core investment for at least another generation. When my successor inherits these portfolios, I think PRF will still be in there. 
What advice would you give an investor interested in fundamental ETFs who’s maybe wary or uneducated about the space?
The way to think about it is, if the market-cap index has a flaw, it would be that if there are overvalued stocks, then sometimes that index would overweight overvalued stocks. The key word there is “if.” 
It’s how you react to that word “if” that tells you if this index is for you. If you think there are episodes in the market cycle where overvalued stocks arise, then you should probably look more at alternatively weighted indexes to decide which one(s) would be useful as a hedge against that possibility. 

Lara Crigger is a former staff writer for and ETF Report.