Best & Worst Smart Beta ETFs

August 06, 2015

Smart-beta ETFs have been all the rage recently, attracting billions of dollars in inflows. These funds, which often share little in common other than the fact that they aim to outperform traditional, market-cap-weighted index funds, are extremely varied in their strategies. Unsurprisingly, just as varied as their strategies is their performance.

Since the start of 2015, there have been both big winners and big losers in the smart-beta space. That said, the top-performing smart-beta ETFs so far in 2015 do share some commonalities. Nine of the 10 funds on the list are related to either health care, Japan or Europe.

These are the hot areas of the market to begin with, but some of these smart-beta ETFs even outperformed their plain-vanilla counterparts, which is what they strive to do.

Obamacare Boosts Health Care

Topping the list was the PowerShares Dynamic Pharmaceuticals ETF (PJP | B-82), with a return of nearly 23 percent through July. The fund is one of three health care ETFs in the top 10; the health care sector has benefited significantly from spending on "Obamacare," the government program that has insured millions of Americans.

In contrast to the typical cap-weighted approach, PJP weights its constituent companies by various fundamental and risk factors. That's given the fund a greater tilt toward small- and midcaps compared with a vanilla fund such as the iShares U.S. Pharmaceuticals ETF (IHE | A-69). PJP's methodology has enabled it to outperform IHE, which has returned a still-impressive 20.4 percent this year.

The other two health care names on the list are the PowerShares DWA Healthcare Momentum ETF (PTH | B-46) and the PowerShares Dynamic Biotech & Genome ETF (PBE | B-52), with gains of 20 percent and 18.7 percent, respectively.

PTH's momentum strategy, in which it selects its holdings based on relative strength and price momentum, handily outperformed other broad-based health care ETFs, such as the Health Care Select SPDR (XLV | A-94), with a 20 percent return versus 12.7 percent for XLV.

Meanwhile, in a case where the smart-beta ETF underperforms, PBE significantly lagged the return of the cap-weighted biotech sector heavyweight, the iShares Nasdaq Biotechnology ETF (IBB | A-44), with a mere 18.7 percent gain versus 26 percent for IBB.

In contrast to the biotech benchmark, PBE includes companies in the nascent genome industry, and uses a multifactor system to select which stocks to hold.

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