Four Alpha-Seeking ETFs Crushing SPY

by on April 30, 2010 | ETFs Mentioned:

One of the hottest topics in the industry at present is the future of actively-managed ETFs. The issue is also a very divisive one; some expect that widespread adoption of active ETFs is only a matter of time, while others believe mutual funds will continue to be the vehicle of choice for those interested in active management. So far, the flows into active ETFs have been little more than a trickle, although a few funds have seen spikes in assets in recent weeks (see Three Active ETF Gamechangers).

The steady surge in popularity of “enhanced” or “intelligent” ETFs has received far less publicity, but has been an interesting development in the ETF industry over the last year. While the majority of ETF assets are found in products that replicate traditional cap-weighted benchmarks (such as the S&P 500, Russell 1000, or MSCI EAFE Index), alternative indexing strategies have become increasingly popular (see Nine Twists On S&P 500 ETFs). In addition to methodologies that use other fundamental metrics–such as revenue, earnings, and dividends–to determine weightings, a number of ETFs seek to deliver superior investment returns by tracking indexes that employ various quantitative screens and analysis.

Not surprisingly, the ETFs included in the Quantitative Methodology Indexes ETFdb Category have delivered mixed results. Some have blown past traditional cap-weighted benchmarks while others have delivered less-than-impressive returns. All of the ETFs in this ETFdb Category are tagged as “passive” in our ETF screener, as each of them is designed to replicate the performance of a specific index. But they all provide an opportunity to outperform broad market indexes traditionally used as barometers of market performance. Below, we profile five funds that have beaten the S&P 500 SPDR (SPY) by a wide margin since markets bottomed out in the first quarter of last year (for more ETF insights, sign up for our free ETF newsletter):

  • Claymore/Clear Spin-Off ETF (CSD): This ETF is based on the Beacon Spin-Off Index, a benchmark that includes approximately 40 stocks that have been spun-off within the last two years. CSD is up more than 110% since the beginning of March 2009, putting it well ahead of SPY. It’s worth noting, however, that almost 75% of CSD consists of small and mid cap companies–not surprising given the methodology of the underlying index–so SPY might not be the best comparison. Over the same period, the iShares Russell 2000 Index Fund (IWM) is up about 90%. See CSD’s fact sheet.
  • PowerShares DWA Technical Leaders (PDP): This ETF tracks the Dorsey Wright Technical Leaders Index, a benchmark that includes companies with strong relative strength characteristics. This list is constructed by analyzing the performance of each of the largest U.S.-listed companies compared to a benchmark index, as well as the relative performance of industry sectors and sub-sectors. According to PDP’s market cap breakdown, more than 70% of the underlying holdings are mid-cap stocks. PDP is up almost 80% since March 2009; SPY has gained 67% over that same period.
  • Claymore/Raymond James SB-1 Equity ETF (RYJ): This ETF tracks the performance of the Raymond James SB-1 Index, a benchmark made of up stocks that receive a “Strong Buy-1″ rating from Raymond James & Associates. At present RYJ’s current holdings are spread across large, mid, and small cap stocks, with a heavy tilt towards U.S. equities (see complete x-ray of RYJ). This ETF is up about 110% since March 2009.
  • Claymore/Sabrient Insider ETF (NFO): This ETF tracks the Sabrient Insider Sentiment Index, which represents a group of securities reflecting favorable corporate insider buying trends. In order to gauge these favorable trends, both public filings of corporate insiders and Wall Street analyst earnings estimate increases are considered. About 80% of NFO’s holdings are small or mid cap stocks, and this ETF is up about 115% since March 2009.

Disclosure: No positions at time of writing.