The Harsh Light Of Day

March 08, 2007

A look at how the market-beating, fundamental, timeliness, dividend and other specialty ETFs performed when the market crumbled.

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.

ETF PERFORMANCE DURING THE MARKET PULLBACK
(ranked by net return)

 

Fund Name

ETF

Feb. 26 Close

March 5 Close

  Return

Relative Perf.

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%

PowerShares DB Commodity Index

DBC

25.31

24.43

-3.48%

1.91%

iShares GSCI Commodity Index Fund

GSG

40.99

39.55

-3.51%

1.87%

PowerShares Dynamic Large Cap Portfolio

PJF

26.23

25.14

-4.16%

1.23%

First Trust Value Line Equity Allocation Index

FVI

20.48

19.55

-4.54%

0.85%

PowerShares Dividend Achievers

PFM

17.36

16.56

-4.61%

0.78%

First Trust Morningstar Dividend Leaders Fund

FDL

23.93

22.79

-4.76%

0.62%

Dow Diamond

DIA

126.34

120.3

-4.78%

0.61%

PowerShares Dynamic Market Portfolio

PWC

52.23

49.65

-4.94%

0.45%

Vanguard High Dividend Yield

VYM

52.6

50

-4.94%

0.44%

WisdomTree High Yielding Equity

DHS

59.12

56.19

-4.96%

0.43%

Claymore/Sabrient Defender ETF

DEF

26.33

25.02

-4.98%

0.41%

WisdomTree LargeCap Dividend

DLN

59.25

56.18

-5.18%

0.21%

PowerShares Dynamic Deep Value Portfolio

PVM

26.05

24.7

-5.18%

0.20%

First Trust Value Line Dividend Index Fund

FVD

17.34

16.44

-5.19%

0.20%

iShares S&P 500 Growth

IVW

66.25

62.76

-5.27%

0.12%

First Trust DB Strategic Value Index Fund

FDV

23.18

21.95

-5.31%

0.08%

PowerShares High Yield Equity Dividend Achievers Portfolio

PEY

16.32

15.45

-5.33%

0.06%

Spider (S&P 500)

SPY

145.17

137.35

-5.39%

0.00%

iShares S&P 500 Value

IVE

79.17

74.86

-5.44%

-0.06%

WisdomTree Dividend Top 100

DTN

61.15

57.82

-5.45%

-0.06%

PowerShares Dynamic MagniQuant

PIQ

27.92

26.39

-5.48%

-0.09%

PowerShares RAFI 1000

PRF

60.03

56.71

-5.53%

-0.14%

Claymore/Zacks Yield Hog

CVY

27.3

25.79

-5.53%

-0.14%

Rydex Equal-Weight S&P 500 Portfolio

RSP

49.78

46.92

-5.75%

-0.36%

First Trust IPOX-100 Index

FPX

23.37

21.86

-6.46%

-1.07%

PowerShares Value Line Industry Rotation Portoflio

PYH

27.61

25.8

-6.56%

-1.17%

PowerShares Value Line Timeliness Select Portfolio

PIV

17.04

15.89

-6.75%

-1.36%

Claymore/Sabrient Insider

NFO

28.7

26.74

-6.83%

-1.44%

Claymore/Zacks Sector Rotation

XRO

29.6

27.5

-7.09%

-1.71%

iShares MSCI EAFE

EFA

76.72

70.9

-7.59%

-2.20%

streetTRACKS Gold

GLD

68.1

62.93

-7.59%

-2.20%

PowerShares International Dividend Achievers

PID

19.43

17.9

-7.87%

-2.49%

Claymore/Sabrient Stealth

STH

28.83

26.13

-9.37%

-3.98%

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.

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