Barclays has long been a leader in the ETN market as the company has several dozen products under its iPath and ETN+ brand names. However, product development has been on a hiatus as of late, as the firm didn’t launch a product for roughly a one year span despite the continued growth of the broader ETF industry.
Fortunately, this appears to be coming to an end as the firm recently revealed its latest addition to its lineup, this time with a focus on American equities. The new note, the Barclays ETN+ Shiller CAPE ETN (CAPE - ETF report), looks to give investors a new way to play the markets using an interesting methodology from one of the brightest minds in the investing world, Robert Shiller.
The ETN will utilize the Cyclically Adjusted PE Ratio, or CAPE Ratio, as the main component of the index’s methodology. This Shiller developed metric takes into account the average inflation-adjusted earnings from the previous 10 years in order to come up with a PE that is potentially smoother and more representative of the long-term potential and health of stocks (see Three Low Beta Sector ETFs).
Currently, this metric, for the S&P 500 is coming in below 22.5, although it should be noted that this well above the mean since 1870 which is 16.44, and even higher above the median which is at 15.85. Meanwhile, it is also worth pointing out that the CAPE ratio is well within historical peaks and nadirs, as the minimum reading for this figure was just below 5 while the maximum was over 44.
Yet, this is just for the broad market, a factor that the CAPE ETN will take into account but not one that the note will be entirely based on. Instead, the note will drill down in order to find the CAPE ratio for the various market sectors in order to find the ones that are the most undervalued from a historical perspective (see ETFs Vs. ETNs: What’s The Difference?).
According to IndexUniverse, the company will select for investment the four most undervalued sectors that possess relatively strong price momentum over the past year. This will be represented by equally weighted notional long position in the total return versions of the various sectors that are picked for inclusion in the ETN’s benchmark.
In this way, the CAPE ETN looks to target the segments of the economy that are the most undervalued while forgoing exposure to segments which are potentially the most overvalued. With this strategy, the ETN looks to beat out broad benchmarks which do not possess this type of sector shifting exposure.
“The ETN utilizes Professor Shiller’s frequently cited CAPE ratio applied for the first time to sectors to create a value-oriented sector strategy developed through research conducted by Barclays and Professor Shiller over the course of a year-long collaboration,” said Laurence Black, a Director in Equity and Funds Structured Markets (EFS) at Barclays.
It should also be noted that the product looks to charge investors 45 basis points a year in fees, which is a reasonable level for an ETN. However, volumes are likely to be low for the product and a lack of preparedness on the part of the provider—no information was available on the site on day two of the product’s life—suggests that this could have some trouble garnering assets, at least in the short-term (read The Truth about Low Volume ETFs).
With that being said, the product does offer up a novel way to target broad American markets in a way that potentially avoids lower quality sectors at the same time. While no other ETN or ETF utilizes the CAPE methodology, there are a handful out there that are also looking for undervalued stocks or sectors, which could pose as potential competitors to the newly launched CAPE ETN.
One of the newest ones, the Huntington US Equity Rotation Strategy ETF (HUSE - ETF report), looks to underweight and overweight various sectors of the S&P Composite 1500 in order to outperform the broad market. The product is a tad expensive at 0.95% a year, while volumes are rather low suggesting wide bid ask spreads-- although the liquidity of the underlying securities could keep this low overall (see Huntington Bank Launches New ETF).
Another product that could offer up some competition is the relatively new Rockledge SectorSAM ETF from AdvisorShares. This product looks to invest in top performing sectors as well, although it will also short ones that are expected to underperform, creating a dollar neutral portfolio overall. Once again, fees are a little high when compared to broad market funds with SSAM charging 1.5% per year (Read AdvisorShares Launches Rockledge SectorSAM ETF).
While these might not have the most assets, there still appears to be a solid demand for rotational strategies in today’s market environment, especially if certain industries continue to move independently of their peers to a large extent. Should this trend continue, investors may want to consider a closer look at CAPE, or other exchange-traded products in the space, in order to benefit from this situation over the long term.
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