Over the past few years, we've seen a seemingly endless array of fundamentally weighted, timeliness-seeking, dividend-focused and other specialty exchange-traded funds (ETFs) hit the market. Sometimes, the methodologies behind these ETFs are simple and clearly disclosed; other times, they are complete black boxes. Regardless of the methodology, however, these ETFs have been launched with the same premise: market-cap weighted indexes are inefficient because they get caught up in market bubbles; you can outperform the market by using an alternate methodology.
So … is it true?
Unfortunately, it's still too early to say. Most of these funds have launched within the past year, and you shouldn't stake too much on a one-year track record. (The backtested data should be largely ignored, as it is far too easy to backtest your way to strong results.)
But the recent market kerfuffle provided a nice, micro-test case of how these ETFs perform under fire. Were you better off holding one of these alternatively weighted ETFs during the market meltdown of late-February/early-March?
It depends. The table below shows the performance of 35 ETFs over the market meltdown, starting with the closing price on February 26 and ending with the closing price on March 5. The list includes a variety of dividend-weighted, fundamentally weighted, value-tilted and quantitatively driven ETFs, as well as a variety of ETFs from traditional diversifying asset classes: bonds, commodities and gold.
I use the SPDR (AMEX: SPY) ETF as the measure of the market, and compared that to ETFs focused on the broad market and/or large-cap sectors. The comparison is not entirely fair, in that each ETF represents a different segment of the market. But investors are being encouraged to swap these alternative ETFs for broad market and/or large cap exposure, so in that sense, the comparison is telling.
The study did not include all available commodity and fixed-income ETFS; instead, just a few were included as an example.
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ETF PERFORMANCE DURING THE MARKET PULLBACK |
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Fund Name |
ETF |
Feb. 26 Close |
March 5 Close |
Return |
Relative Perf. |
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|
iShares Lehman Aggregate |
AGG |
100.51 |
100.58 |
0.07% |
5.46% |
|
|
iShares Lehman Short-Term Treasury |
SHV |
109.12 |
108.9 |
-0.20% |
5.19% |
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PowerShares DB Commodity Index |
DBC |
25.31 |
24.43 |
-3.48% |
1.91% |
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|
iShares GSCI Commodity Index Fund |
GSG |
40.99 |
39.55 |
-3.51% |
1.87% |
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PowerShares Dynamic Large Cap Portfolio |
PJF |
26.23 |
25.14 |
-4.16% |
1.23% |
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First Trust Value Line Equity Allocation Index |
FVI |
20.48 |
19.55 |
-4.54% |
0.85% |
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PowerShares Dividend Achievers |
PFM |
17.36 |
16.56 |
-4.61% |
0.78% |
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First Trust Morningstar Dividend Leaders Fund |
FDL |
23.93 |
22.79 |
-4.76% |
0.62% |
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Dow Diamond |
DIA |
126.34 |
120.3 |
-4.78% |
0.61% |
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PowerShares Dynamic Market Portfolio |
PWC |
52.23 |
49.65 |
-4.94% |
0.45% |
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Vanguard High Dividend Yield |
VYM |
52.6 |
50 |
-4.94% |
0.44% |
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WisdomTree High Yielding Equity |
DHS |
59.12 |
56.19 |
-4.96% |
0.43% |
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Claymore/Sabrient Defender ETF |
DEF |
26.33 |
25.02 |
-4.98% |
0.41% |
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WisdomTree LargeCap Dividend |
DLN |
59.25 |
56.18 |
-5.18% |
0.21% |
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PowerShares Dynamic Deep Value Portfolio |
PVM |
26.05 |
24.7 |
-5.18% |
0.20% |
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First Trust Value Line Dividend Index Fund |
FVD |
17.34 |
16.44 |
-5.19% |
0.20% |
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iShares S&P 500 Growth |
IVW |
66.25 |
62.76 |
-5.27% |
0.12% |
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First Trust DB Strategic Value Index Fund |
FDV |
23.18 |
21.95 |
-5.31% |
0.08% |
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PowerShares High Yield Equity Dividend Achievers Portfolio |
PEY |
16.32 |
15.45 |
-5.33% |
0.06% |
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Spider (S&P 500) |
SPY |
145.17 |
137.35 |
-5.39% |
0.00% |
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iShares S&P 500 Value |
IVE |
79.17 |
74.86 |
-5.44% |
-0.06% |
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WisdomTree Dividend Top 100 |
DTN |
61.15 |
57.82 |
-5.45% |
-0.06% |
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PowerShares Dynamic MagniQuant |
PIQ |
27.92 |
26.39 |
-5.48% |
-0.09% |
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PowerShares RAFI 1000 |
PRF |
60.03 |
56.71 |
-5.53% |
-0.14% |
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Claymore/Zacks Yield Hog |
CVY |
27.3 |
25.79 |
-5.53% |
-0.14% |
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Rydex Equal-Weight S&P 500 Portfolio |
RSP |
49.78 |
46.92 |
-5.75% |
-0.36% |
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First Trust IPOX-100 Index |
FPX |
23.37 |
21.86 |
-6.46% |
-1.07% |
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PowerShares Value Line Industry Rotation Portoflio |
PYH |
27.61 |
25.8 |
-6.56% |
-1.17% |
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PowerShares Value Line Timeliness Select Portfolio |
PIV |
17.04 |
15.89 |
-6.75% |
-1.36% |
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Claymore/Sabrient Insider |
NFO |
28.7 |
26.74 |
-6.83% |
-1.44% |
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Claymore/Zacks Sector Rotation |
XRO |
29.6 |
27.5 |
-7.09% |
-1.71% |
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iShares MSCI EAFE |
EFA |
76.72 |
70.9 |
-7.59% |
-2.20% |
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streetTRACKS Gold |
GLD |
68.1 |
62.93 |
-7.59% |
-2.20% |
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PowerShares International Dividend Achievers |
PID |
19.43 |
17.9 |
-7.87% |
-2.49% |
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Claymore/Sabrient Stealth |
STH |
28.83 |
26.13 |
-9.37% |
-3.98% |
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As you can see, 19 of 34 (56 percent) alternative ETFs outperformed the SPDR. The top four performing ETFs, however, were two fixed-income ETFs and two broad-market commodity ETFs. Take those out, and the majority of alternative equity ETFs actually trailed the SPDR.
A few points jump out at me here.
One: Things Have Changed
There's a perception that growth stocks will underperform during market pullbacks, but here, the opposite was the case: the iShares S&P 500 Growth ETF (NYSE: IVW) actually beat the iShares S&P 500 Value ETF (NYSE: IVE) by 18 basis points.