Hits & Misses Of 7 Alpha Seeking ETFs

These ETFs promise outperformance, but have they delivered?

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

The stock market hasn't found much traction so far this year. After surging in the previous six years, the S&P 500 has barely budged in 2015, weighed down by a number of scares related to Greece, China, interest rates and commodities.

In their search for positive returns, many investors have crept into alternative strategies. Those include so-called smart beta strategies, which aim to outperform traditional market-cap-weighted indexes.

Others have gone a step further into bolder investments. While some of these strategies could technically fit under the "smart beta" umbrella, they are better described as alpha-seeking strategies that deviate significantly from the traditional index investing approach.

A number of exchange-traded funds have popped up to give investors easy access to these varied strategies. Here we list some of the more interesting of these ETFs out there.

Year-To-Date Returns

1. PowerShares Buyback Achievers (PKW | B-97)

Corporate buybacks are running at a breakneck pace this year after surging 16.3 percent in 2014. According to data from Compustat and Goldman Sachs, buybacks are anticipated to surpass last year's total of $553.3 billion, which itself was the highest level since 2007.

By reducing the number of shares outstanding, companies aim to boost earnings per share, and in turn, stock prices. Proponents of buybacks describe them as a way to return cash to shareholders without the tax consequences of a dividend.

The PowerShares Buyback Achievers ETF (PKW) aims to deliver outperformance by holding companies that have bought back at least 5 percent of their outstanding shares in the past 12 months. The fund has seen inflows of $115 million this year, and now has an impressive $2.9 billion in total assets.

One argument in support of PKW is that companies that are buying back their shares have a lot of cash, and are thus doing well.

On the other hand, detractors say there's no guarantee that buybacks will lift stock prices, and that large buybacks may be a sign of a lack of investment and growth opportunities in a company's core business.

So far in 2015, PKW has underperformed the S&P 500 with a 1 percent total return versus 2.6 percent for the SPDR S&P 500 (SPY | A-98). However, over the past five years, its 142 percent return has handily beaten SPY's 106 percent return.

2. Stock Split Fund (TOFR | C-67)

On June 6, 2014, shares of Apple closed at $645, a record high at the time. The next trading day, the stock opened at $94. No, the stock didn't crash. Rather, Apple shares experienced a 7-for-1 split, a situation in which existing shareholders receive seven shares for each one they previously held.

Nearly a year later, Apple rallied to $133, the equivalent to a presplit value of $931. Did the split catapult Apple higher? Probably not. But stocks tend to split when their prices are rising, and presumably when business is doing well. That makes it a good idea to buy stocks that have recently split; thus the investment thesis behind the Stock Split Index Fund (TOFR), which tracks a basket of 30 stocks that have recently had a stock split.

Unfortunately for the fund, investors haven't bought into the stock-split thesis, with assets under management in TOFR totaling a paltry $4.88 million.

There are many reasons investors may be skeptical of the stock-split strategy. For one, the timing of stock splits is somewhat arbitrary. Management can decide to split a company's stock at any time―or not at all. Secondly, stocks tend to split at all-time highs, and buying high is not necessarily a winning strategy over the long term.

Nevertheless, TOFR has outperformed the market this year, with a 6.3 percent return. Since its inception in September of last year, the fund has also outperformed, with a gain of 11.3 percent versus 6.2 percent for SPY.

3. First Trust US IPO (FPX | B-77)

Last year's 273 initial public offerings was the "most active period of issuance since 406 companies went public in the year 2000," according to Renaissance Capital IPO Intelligence. Net proceeds totaled $85 billion on the back of a big IPO from Alibaba.

Shares of the giant Chinese e-commerce company have performed poorly since going public, but that hasn't quenched investors' thirst for hot IPOs.

Capitalizing on this hot area of the market is the First Trust US IPO ETF (FPX). The fund buys shares in companies that have recently gone public, and proceeds to hold them for no longer than four years. Rival ETF Renaissance IPO (IPO | A-53) takes a somewhat different tack, buying recently IPO'd shares and holding them for only two years. FPX has $860 million in assets, while IPO has $28 million.

The thesis behind these ETFs is that firms that have recently gone public are young, innovative and have a lot of growth ahead of them. While theory doesn't always match up with reality, in this case, it does. FPX has returned 11 percent year-to-date and 189 percent over the past five years, making it the best-performing ETF on this list in both periods.

4. Guggenheim Raymond James SB-1 Equity ETF (RYJ | B-63)

Wall Street is filled with analysts. No matter the sector or stock, there's probably an analyst out there covering it and offering a buy, sell or hold recommendation, along with a price target. The Guggenheim Raymond James SB-1 Equity ETF (RYJ), with $267 million in assets, attempts to capitalize on these experts' recommendations by purchasing the stocks rated as “Strong Buy” by Raymond James analysts.

The Market Vectors Morningstar Wide Moat ETF (MOAT | B-62), with $868 million in assets, employs a similar strategy, but uses recommendations from Morningstar analysts.

Of course, skeptics will argue that stock analysts are not particularly good market timers, and that such a strategy will tend to underperform over time. At least based on the recent history of RYJ, the skeptics seem to have the upper hand in the argument. The fund has been unable to deliver the significant outperformance it has promised. The ETF returned 2.7 percent so far in 2015, matching SPY, and 110 percent during the past five years, just a hair above SPY's 106 percent.

5. Direxion All Cap Insider Sentiment ETF (KNOW | B-83)

Who knows better about the prospects of a company than the CEO and other top executives? That's the thesis underlying an investment in the Direxion All Cap Insider Sentiment ETF (KNOW) and its rival the Guggenheim Insider Sentiment ETF (NFO | C-57), both with around $120 million in assets.

The two ETFs closely follow and mimic insider-buying trends seen in public disclosures. Both funds hold stocks in 100 companies and consider earnings when deciding on what to buy.

Year-to-date, KNOW has outperformed the market, with a gain of 4.6 percent, almost double that of SPY. It has also delivered outperformance since its inception in December 2011 with a gain of 101 percent versus 82 percent for SPY.

6. Guggenheim Spin-Off ETF (CSD | C-56)

One way in which a company with multiple businesses or segments may try to unlock value for shareholders is through a spinoff. By spinning off one of these segments into its own separate company, the hope is that the new firm (and old) will be more focused on its core business.

The Guggenheim Spin-Off ETF (CSD), which has accumulated a solid $500 million in assets, holds stocks of "a group of companies that have recently been spun off from larger corporations and have the opportunity to better focus on their core market segment and outperform."

Since the start of the year, CSD has failed to deliver on its promise, with a mere 0.6 percent return. However, over the past five years, it's done well, with a 132 percent return, beating the S&P 500.

7. Forensic Accounting ETF (FLAG | D-75)

Rounding out our list is the Forensic Accounting ETF (FLAG). The fund rates the earnings quality of companies within the U.S. large-cap space, and then gives a greater weight to companies with higher earnings quality.

A supplement from July indicated that the fund plans to change its index soon and become a long/short ETF, which would give it opportunities to profit from falling stocks as well. However, the fund will continue to employ its forensic accounting strategy, which "critically dissects companies’ financial statements with the goal of identifying the ‘red flags’ of aggressive accounting and revenue recognition practices."

FLAG has attracted only $13 million in assets, and its poor performance may be the reason. Year-to-date, the ETF is down 3.5 percent, the worst performance on this list. Moreover, since inception in January 2013, the fund is only up 39.1 percent, the worst performance in that period.

Five-Year (or since inception) Returns

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.