When the ETF industry burst on to the investing scene, the initial wave of growth was driven primarily by equity products that sought to replicate the performance of well-known indexes, including the S&P 500, Dow Jones Industrial Average, and Nasdaq. In recent years cash flows to these “super index” equity ETFs has slowed, but exchange-traded commodity products and fixed income ETFs have picked up the slack. Looking forward, many industry insiders expect actively managed ETFs to drive the next growth spurt, competing more directly with mutual funds for assets of those with a longer time horizon.
Active ETFs have been slow to gain traction, but a sliver of the ETF universe positioned between active and passive is showing signs of catching on. While there are still relatively few ETFs linked to “enhanced” or quantitative indexes, the number has been growing steadily over the past few years as investors have gained comfort with the use of ‘alpha-seeking’ ETFs as a part of their portfolio. One option available to investors seeking to use a quantitative approach is the PowerShares Dynamic MagniQuant ETF (PIQ). The fund tracks the Top 200 Dynamic Intellidex Index, which is designed to identify 200 stocks that have the greatest potential for capital appreciation. The “Intellidex” methodology thoroughly evaluates the investment merit of the 2,000 largest U.S. companies by analyzing numerous unique financial characteristics from four broad financial perspectives: fundamental, valuation, timeliness, and risk (see “Quasi-Active” ETFs Explained).
According to PowerShares, the MagniQuant Intellidex is the only “Intellidex that does not sort stocks by sector, industry, style or market cap,” meaning that the underlying index isn’t limited to a certain style box or required to provide a wide representation of diverse market sectors. PowerShares believes that this allows the index “to seek alpha not only through stock selection, but through style, sector or market-cap allocations as determined by the model.” So for investors looking for a strategy that doesn’t face a long list of constraints that may affect its market cap breakdown or sector weighting, PIQ might be worth a closer look (see more about Intellidexes in PowerShares’ PDF report).
PIQ offers a diverse mix of large, medium, and small cap firms; the average market capitalization of its holdings is just under $16 billion, but the fund makes significant allocations to mid, small, and micro cap stocks as well (see more on PIQ’s holdings). Currently, the fund is heavily weighted in consumer discretionaries (about 30%), technology (21%), and industrials (14%), while maintaining minimal allocations in telecommunication (0.5%), energy (0.5%), and utilities (0.5%).
PIQ’s holdings total about 200, with weightings spread relatively evenly across all constituents, so no one stock accounts for a particularly large portion. As of June 1, the largest weightings were given to SanDisk and Dollar Thrifty, though both those allocations camp in under 0.8% apiece.
Over the past 52 weeks, PIQ has gained about 24.6%, putting it almost 500 basis points ahead of the S&P 500 SPDY (SPY) over that period (see more PIQ fundamentals).
Disclosure: No positions at time of writing.