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Despite some recent weakness in the stock markets, investors have seen a pretty good year overall with broad benchmarks like the S&P 500 gaining considerably in the year-to-date time frame. In fact, the S&P 500 is actually up over 10.8% since the start of January, marking a pretty solid period for equities even with some mid-year volatility.
This impressive performance in the first nine months of 2012 suggests that most investors have seen positive returns so far this year, save for a few underperforming segments. However, this performance by the benchmark actually pales in comparison to a few more ‘active’ ETFs which either utilize management’s help to select securities or follow a more rigorous index that can often screen out stocks that are poised to underperform (read No Dividend Tax Debate for These High Yield ETF)..
While these strategies don’t often help investors, there have been at least a few cases this year in which funds targeting broad markets with an active or ‘enhanced’ approach have delivered and generated alpha in their portfolios.
In light of this, we have highlighted a few ETFs below which have managed to beat out broad benchmarks despite their relatively high fees and the incredibly solid performance of the S&P 500 in the time frame in question:
For investors seeking an index-following choice in the large cap space, PXLG could be an interesting and often overlooked choice. The ETF tracks the RAFI Fundamental Large Growth index which looks to give broad exposure to the large cap growth segment, but without weighting based on market capitalization levels.
Instead, the fund uses an approach from Research Affiliates to construct the index, weighting securities based on four fundamental factors; book value, cash flow, sales, and gross dividends. This process breaks the link between market cap and weight, and thus can be less influenced by market bubbles and provide a more disciplined approach to investing (read Time to Consider Pure Growth and Value ETFs?).
Currently, this results in a portfolio that has roughly one-fourth of its assets in staples, and then another 20% each in health care and technology. Top holdings include well-known large caps like Merck (MRK), Procter & Gamble (PG), and Coca-Cola (KO), suggesting that it is very focused on mega caps for exposure.
This technique costs investors a relatively low 39 basis points a year in fees—after waivers—although volume is quite low suggesting wider bid ask spreads. Still, the dividend comes in at about 1.7% a year while the fund has outperformed the S&P 500 by about 400 basis points in the year-to-date time frame.
The only true active ETF on this list comes to us from one of the market leaders in non-index following products, AdvisorShares. The Maryland-based firm has teamed up with TrimTabs to bring investors this fund which looks to outperform the Russell 3000 index with less volatility by focusing in on liquidity and fundamental characteristics.
The company believes that stock prices are a function of supply and demand rather than value, looking for stocks that have seen their ‘float shrink’ in the trailing 120 days. With this process, along with a few key fundamental metrics like profitability and balance sheet ratios, the firm looks to find stocks where a given amount of money is chasing a smaller number of shares, a process which hopefully drives up the stock price in the process.
This system currently results in a very spread out fund, as no one security accounts for more than 1.2% of the total assets. From a sector look, consumer discretionary takes the top spot at 35% and is closely trailed by technology which makes up another 255 of the fund (see Three Overlooked Active ETFs).
The product has handily beat out the S&P 500 on the year-to-date front, as it has outpaced the benchmark by about 350 basis points in the time frame. However, the cost of the fund is somewhat high at 0.99% a year while volume is also quite low, meaning that a wide bid ask spread could be seen when buying or selling TTFS.
This ETF is one of the more popular funds on the list with over $125 million in AUM, while it is also one of the oldest, coming up on its 10th birthday next year. The product looks to track the Dynamic Market Intellidex Index which evaluates companies based on a variety of criteria in the fundamental sphere.
These criteria include growth, stock valuation, investment timeliness, as well as risk factors. Based on this ranking system, the 100 stocks with the best metrics are slated for inclusion in the index and then PWC (read A Primer on ETF Investing).
Like its PowerShares counterpart, this fund has a focus on large caps, as represented by top holding Chevron (CVX), and then Marathon Petroleum (MPC), CVS Caremark (CVS), and Wal-Mart (WMT) rounding out the top four.
This fund also has a tilt towards technology (19.7%), while a smattering of other segments receive at least 10% including; staples, consumer discretionary, energy, financials, health care, and industrials, suggesting a well spread out portfolio from this look.
Like the other funds on this list, this product has outperformed the S&P 500, beating out the benchmark by roughly 250 basis points since the start of the year. Additionally, the fund has a net expense ratio of 60 basis points and tight bid ask spreads, so total costs are unlikely to be too great in this ETF.
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