'Patent' ETF a Way to Play Large-Cap Growth
A few days ago I wrote about the new Claymore/Sabrient Defender ETF (DEF) as having a secondary effect of being a proxy for large-cap value. That same day, Claymore listed the Ocean Tomo Patent 300 ETF (OTP), which could be a proxy for large-cap growth.
The big-picture idea behind Ocean Tomo Patent 300 ETF is that as the U.S. economy has evolved, there is now more economic value to be derived from intangible assets, like patents, than from tangible assets, like plants and equipment. Without being an expert on this, it does seem intuitive that the idea at least has some merit.
As you might expect, the back test also supports the idea. Over the last 10 years, the patent weighting has averaged 3 percentage-point better returns annually over the S&P 500, with a 92% correlation to the index. The methodology assesses the economic value of a company's patent portfolio, then assigns a score to that portfolio and ranks it with other companies. The universe of companies is the 1,000 most-liquid stocks, which creates a tilt to large-cap.
When I first heard about this fund, it occurred to me that financial companies don't have much in the way of patents, and sure enough, I was told in an interview with Ocean Tomo that there is only one stock from that sector in the fund.It was at this point that the secondary effect as a large-cap-growth proxy seemed plausible. While the back test was a decade, the real-world trading is only a few days, so there may not be much immediacy to buy the fund. But I believe there is an interesting strategy that presents itself if the fund lives up to the back test. To repeat, the thesis is that OTP is a large-cap growth proxy. I believe that most of the large-cap dividend ETFs are likely proxies for large-cap value. A blend of the two could offer better results than just holding the S&P 500 SPDR (SPY). I was not able to get dividend information for OTP, but using the yield from iShares S&P 500 Growth Index Fund (IVW) as a proxy, OTP might yield close to 1.21%. The WisdomTree High-Yielding Equity Index Fund (DHS) is supposed to yield roughly 3.5%. A 50/50 mix could yield 2.35%, compared with 1.71% for the S&P 500. As mentioned above, OTP's back test has beaten the S&P 500 by an average of 3 percentage points a year. The DHS fund from WisdomTree has outperformed by an average of 3.5 percentage points over the last 10 years. (I should note that WisdomTree's back test was against the Russell 1000, which has a 95% correlation to the S&P 500.)
|The TOMO With Momo
Ocean Tomo 300 Index annual total returns vs. S&P 500 Index
|Year||Ocean Tomo 300 index||S&P 500 Index|
|YTD through 11/30||11.63||14.19|
|* Annual total returns are for the noted 1-year periods beginning 12/31 and ending 12/31 the following year |
Source: Zephyr StyleADVISOR
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV