The Value of Value Line

November 22, 2005

PowerShares prepares to launch a fund tied to the oldest market timing system on the books; pushing the limits of passive management.

PowerShares Capital Management continues to probe the limits of passive investing. PowerShares announced plans on November 22 to launch a new exchange-traded fund (ETF) tied to the Value Line stock ranking system, which combines fundamental analysis with marketing timing in an attempt to "beat the market."  The new fund is expected to launch in December.

The new fund will follow Value Line's "Timeliness" indicator to select 50 stocks that it believes will appreciate the most over the next six to twelve months.  The Timeliness ranking system is a proprietary system that looks at "millions of data items," according to Value Line's literature.  Generally, the system follows some sort of momentum strategy tied to rising profits and rising stock prices.

Perhaps the most interesting thing about this new fund is that it will put to the test the incredible claims of Value Line's proprietors. According to the Web site, if an investor had bought Value Line's  #1 ranked stocks for Timeliness at the beginning of each year since 1965, and sold them at the end of each year, they would be sitting on a 19,913 percent return.  That's 16X-better than the S&P 500 over the same time period.

That's a pretty bold claim for a market timing system, even if it comes from one of the most respected names in the business.

The PowerShares ETF will select 50 stocks from the top 100-ranked Timeliness stocks from Value Line.  The chosen 50 will be those that score highest on Value Line's "Technical" and "Safety" rankings. These stocks will form the "Value Line Select Index."Based on backtesting, this index has outperformed the S&P 500 handily over the past ten years, returning 16.95 percent per annum compared to just 9.49 percent for the S&P.  The Value Line index has, however, had significantly higher volatility.

The Value Line launch is part of a broader expansion by PowerShares beyond is core "Intellidexing" portfolios.  The company has clearly become a partner of choice for established market newsletters like Value Line that are looking to expand their reach.  Earlier this year, PowerShares launched a micro-cap fund tied to the quantitative analysis of Value Line - competitor Zacks Investment Reserach.  The PowerShares Zacks Microcap Portfolio, launched in August 2005, currently has $85 million in assets.

 

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