6 ‘Smart Beta’ ETFs For Earnings Season

July 18, 2014

2) Midcap ETFs: EZM Vs. RWK


In the midcap space, EZM is slightly lagging RWK this year, with returns of 5.9 percent versus 6.1 percent for RWK. EZM has a heavier exposure to the financials and industrials sectors. EZM currently includes Liberty Interactive Group, which consists of TripAdvisor, Expedia and American Airlines, and it also holds Joy Global, a maker of mining equipment.

RWK’s heavy focus on consumer cyclicals include electronics maker Ingram Micro; World Fuel, a global fuel supplier; as well as Tech Data, a distributor of tech products.

RWK’s annual expense ratio is 0.54 percent, or $54 for every $10,000 invested, versus 0.38 percent for EZM.

3) Small-Cap ETFs: EES Vs. RWJ


Charts courtesy of StockCharts.com

In the small-cap space, EES has recorded a loss of 1.2 percent year-to-date, while RWJ has gained about 1.5 percent. Small-caps tend to outperform larger-caps early in an economic recovery, and the fact that these two ETFs are lagging the other two sets of ETFs being compared here is emblematic of that. After all, the current rally in stocks is five years old.

In any case, both funds have a healthy exposure to consumer cyclicals, with EES’ current top holdings being American Axle Manufacturing, an auto component maker; as well Cooper Tire & Rubber and MDC Holding, a homebuilder.

RWJ’s top three holdings include health care concern Centene Corp.; information tech company Synnex Corp.; and Group 1 Automotive, an auto retailer.

EES sports an expense ratio of 0.38 percent, or $38 for every $10,000 invested, while RWJ charges 0.54 percent.

Getting To The Bottom Line, Sort Of

According to Bogart, investors who use earnings as a gauge may wind up with companies in their portfolios that don’t fit the bill.

For example, Bogart said a company that’s doing well might invest some of its increased revenue on business development, thus detracting from earnings. That, in turn, would result in the company becoming a smaller portion of an earnings-weighted portfolio.

Meanwhile, a relatively disadvantaged company in the space might recognize its poor positioning and decide to keep expenses low and milk whatever earnings it can. The result here would be that an earnings-weighted portfolio would give a heavy allocation to the competitively disadvantaged company and a much lighter allocation to the competitively advantaged company—exactly the opposite of what investors would want in their portfolios.



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