“Active Index” ETF Wave Continues

September 22, 2006

Claymore Securities launches 5 quantitatively driven indexes that begin trading on the AMEX.


Claymore Securities has launched five new exchange-traded funds (ETFs) that will trade on the American Stock Exchange.  Following closely on the heels of Claymore's expansion in the Canadian ETF market (it recently listed three new ETFs onto the Toronto Stock Exchange), these funds represent the Canadian money manager's first foray into the U.S. exchange-listed category. 

The funds are all listed on the American Stock Exchange.

The new Claymore offerings include the Claymore/BNY BRIC ETF (EEB), a passive, market-cap weighted index that aims to track the performance of The Bank of New York BRIC Select ADR Index.  The index, comprised of U.S. exchange-listed depositary receipts of companies from Brazil, Russia, India and China, is one of several BRIC-branded indexes have proliferated recently to accommodate investor expectation that BRIC economies will outstrip the growth rates of developed and other undeveloped nations. 

The remaining Claymore ETFs reflect the growing trend toward semi-active or active ETFs, which seek to outperform passively indexed vehicles. 

  • The Claymore/Zacks Yield Hog ETF (AMEX: CVY) is a distribution-optimized ETF that is the first to focus on traditional preferred securities, master limited partnerships and closed-end funds. It tracks the Zacks Yield Hog Index which is designed to identify securities with potentially high dividend payout, and which outperform the Dow Jones US Select Dividend Index .
  • The Claymore/Zacks Sector Rotation ETF (XRO) is a "sector rotation" vehicle that seeks to track the Zacks Sector Rotation Index.  The index is designed to determine sector allocations quarterly based on trends in fundamental macroeconomic data, and to capitalize on opportunities to overweight cyclical and non-cyclical sectors in times of economic expansion and contraction.
  • The Claymore/Sabrient Insider ETF (NFO) invests in an index that selects stocks based on insider behavior. This ETF aims to track the performance of the Sabrient Insider Sentiment Index and to invest in companies reflecting favorable corporate insider buying trends (determined via the public filings of such corporate insiders) and Wall Street analyst upgrades.
  • The Claymore/Sabrient Stealth (STH) attempts to capture the neglected stock effect. This ETF seeks to emulate the performance the Sabrient Stealth Index, which is designed to identify 150 small-cap companies that have displayed robust growth characteristics yet remain off of Wall Street's radar screen.

New Offerings On Tap

In addition to these offerings, Claymore, has filed plans with the Securities and Exchange (SEC) for two quantitative-driven international ETFs .  The new funds will track "Developed International" and "Developed World" indexes created by Robeco, the active fund management arm of the Dutch banking giant, Rabobank.

How, you ask, does a self-described "active manager" get involved in an indexing firm? As you'd expect: by developing indexes that use an active management style in an attempt to beat the market.

In this case, the indexes use a quantitatively driven strategy that combines valuation, momentum, earnings estimate revisions and management policies to select 200-300 stocks from around the globe with "strong potential for price appreciation and strong risk diversification."  In other words, it attempts to pick the best stocks in the world, using a proprietary "black box" screening method developed by the good folks at Robeco.

The fund may initially have a hard time attracting assets, as investors are basically putting their faith in the idea that Robeco has figured out how to beat the markets.  The company does not have a strong brand in the U.S., and it could be a challenge for Claymore to attract assets until it has an established performance history. By comparison, other quant-driven strategies in the U.S. either have an established performance history - in the case of the Intellidexes from the American Stock Exchange - or a strong brand - in the case of indexes from Value Line and similar providers.  Clearly, however, Claymore believes it can attract those assets over the long haul.

The new "Developed International" fund will track markets in Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom; the "World" fund tosses in the U.S. and Canada for good measure. 

Country weightings within each index are based on straight market capitalization, meaning that the funds will not try to outperform the market by shifting weights towards the most attractive countries. Instead, the stocks within each country will be ranked on chosen based their attractiveness, and the funds will attempt to beat each index within each country.  To ensure liquidity, the funds only choose from stocks with market caps of approximately $1 billion and higher.

The funds are rebalanced monthly; there is no word yet on expense ratios. 

The prospectus is available here

The new funds fill a hole in the "alpha-seeking" arm of the U.S. ETF industry, which is led by PowerShares and which has so far focused on domestic funds. Although both PowerShares and WisdomTree offer dividend-screened international funds, a quant-driven strategy may appeal to investors concerned about a pullback in the red-hot international marketp.  In theory, the quant-driven strategy should help the funds outperform in difficult markets. Still, as mentioned, it will be "show me" time for the funds at first.

Regardless, it is good to see a fund company launching a global fund.  Far too many fund companies break up exposure into U.S. and ex-U.S. funds, encouraging investors to dramatically overweight one or another of the two key markets. The international fund lets investors get it done in one fell swoop.



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