How Do They Compare
The big question for investors is how the new sectors funds compare with the RAFI portfolios already on the market. Both are complete sets of "enhanced index" sector funds, and both aim to outperform the market. The two fund families approach that goal from very different perspectives, however, and as a result, their portfolios are very different as well. An investor should take care when choosing one fund family or the other, as they will perform very differently in different market situations. (This will get more complicated later this year when First Trust launches its Russell-linked "AlphaDex" sector funds.)
As a general rule, the Intellidex funds tilt more towards growth and small caps than the FTSE RAFI portfolios, which select and weight stocks bases on four "fundamental" metrics: book value, income, sales and dividends. The Intellidex indexes use a weighting methodology designed to sharply increase the weight of small-cap stocks, allocating at least 60 percent of the portfolio to "smaller" stocks, and equal-weighting those stocks so that even the smallest names have a substantial impact on the fund.
Below, we compare the two sets of index in the six sector categories that are directly comparable on a variety of fundamental- and performance-based metrics. The FTSE RAFI Consumer Goods and Consumer Staples are not directly comparable to the FTSE RAFI Consumer Discretionary and Consumer Staples funds. All data is through June 30, 2006, and is from PowerShares.
It should be noted that the performance record is based on backtested data, and stretches over a period when small caps easily outperformed large caps. That factor explains why the Intellidexes beat the FTSE RAFI indexes on almost every measure for almost every sector. There's no guarantee that small-caps will continue to perform so well.