Madrona ETFs: Alternatives To Cap Weighting

June 22, 2011

The man behind AdvisorShares’ Madrona ETFs thinks cap weighting has met its match.


Brian Evans, founder and principal of Everett, Wash.-based BondStreet Wealth Management, worked with AdvisorShares to launch the Madrona Forward Domestic ETF (NYSEArca: FWDD), the Madrona Forward International ETF (NYSEArca: FWDI) and the Madrona Forward Global Bond ETF (NYSEArca: FWDB).

When Evans spoke recently to IndexUniverse’s Cinthia Murphy, he talked about the “forward-looking fundamental analysis” that the new AdvisorShares ETFs are built on, and explained why he sees market-cap indexing strategies as a thing of the past.


Cinthia Murphy: You run both a CPA firm and a wealth management company, right?

Brian Evans: Yes; I’m the owner of a 20-year-old CPA firm called Bauer Evans, and in 1999 I started BondStreet Wealth Management in response to what I saw as great demand for investment advice and expertise.

At BondStreet, we build portfolios of mutual funds and ETFs—we have about three dozen different model portfolios today—and we also do a whole slew of other advisory duties such as income tax planning, estate and trust planning, etc. We have about 1,200 clients between the two companies.

Murphy: What triggered the leap from creating model portfolios to creating your own ETFs?

Evans: I’ve come to realize over the years I’ve been doing this that investors have tough choices to make, often accompanied by pitfalls: whether they want to pick individual stocks, which are not broad enough, or whether they want to invest in managed mutual funds, which generally fail to beat their benchmarks.

And finally, they can choose to buy an index, but that comes with a serious flaw, which is that most indexes use market size as their only criteria for buying and weighting stocks. That often means they buy at high levels and sell at low levels, which is backwards.

Murphy: Your move into ETFs was to compete with and offer an alternative to the market-cap-weighted methodologies out there?

Evans: Absolutely. If you look at the dot-com era as an example, a lot of the broad market indexes out there bought heavily into the technology names and ignored other sectors like banks and real estate, many of which were performing at five times their earnings at the time. So, they bought the hot, already-high stocks, and ignored the other ones.

It’s really a “follow-the-herd” mentality that I think misses the point. Wouldn’t it be nice to have a broad investment vehicle that picks stocks based on the present value of future expected earnings?

As a CPA firm, we’re involved in a lot of valuation work, and one recurring theme in that area is that a company’s value is most closely tied to the present value of future expected earnings rather than on the company’s size.


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