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Four of the seven latest exchange-traded funds to be graded by TheStreet.com Ratings distinguish themselves by allocating the investment percentages of stocks in their portfolios using novel formulations. That's a likely indication that portfolio "weighting" methodologies now represent the latest frontiers in the ever-expanding ETF universe.
Virtually every square inch of the earth's real estate is covered in one way or another by at least one "country" or "regional" ETF. In addition, every conceivable permutation of investment style, market value classification and economic sector concentration is well represented by an ETF. Creative portfolio-weighting schemes, therefore, would represent likely paths of least resistance for maintaining the expansion of that investment genre's population growth.
A quartet of PowerShares internationally focused "FTSE RAFI" dominates the accompanying list of the seven ETFs most recently graded by TheStreet.com Ratings. FTSE is a partnership of
The Financial Times
of the United Kingdom and the London Stock Exchange. It creates and maintains hundreds of market indices. Research Associates, a California company, created the methodologies for the new indices, which are tagged "fundamental index" (Financial Associates Fundamental Indices) weightings.
Market indices traditionally have been constructed by assigning every component stock in a gauge a "weighting" proportionate to the security's total market value. Thus, a stock with a large-market capitalization would influence the index more than a small-cap issue. In recent years, some so-called "equal weighted" ETFs were introduced that assigned every component of an index, such as the S&P 500, equal representation.
ETF management firm Wisdom Tree gained notoriety by weighting its funds according to dividends. Other managers tried different weighting structures. The newly graded PowerShares FTSE RAFI entries are weighted according to more complex algorithms that include factors such as revenue, cash flows, book values and dividends of the constituent corporations.
The new portfolio-weighting formulas have not succeeded in immunizing the PowerShares ETFs from the worldwide bear market. Each is in double-digit negative territory for the latest three months, year to date and 12 months.
The best of the RAFI funds for the year to date is the
PowerShares FTSE RAFI Developed Markets ex U.S. Small/Mid Cap ETF
, off 28.31% for the period. Among its largest holdings is
Although down 28.13% for the period, the best-performing RAFI fund among the four newcomers for the latest 12 months is the
PowerShares FTSE RAFI Emerging Markets ETF
. Its major holdings include
The worldwide bear market has driven the five FTSE RAFI funds on the list down to TheStreet.com Ratings grades in the "E" range, which equate with sell recommendations.
Another newly graded PowerShares ETF is the
PowerShares International Listed Private Equity ETF
. It seeks investment results before fees and expenses that correspond generally to the price and yield performance of an index called the International Listed Private Equity Index. The fund invests at least 90% of its total assets in stocks that comprise the index and American depositary receipts based on the component stocks in that index. The index represents a diversified exposure to both a number of private equity firms or managers as well as the consolidated exposure of the underlying portfolio investments.
Like the four international FTSE RAFI funds, the PowerShares International Listed gets a rating in the "E" range from TheStreet.com Ratings, giving it a recommendation of sell.
But the pair of municipal bond ETFs on the list both rated marks in the "A" range by TheStreet.com Ratings. The grades place the funds in the category of those with buy recommendations.
Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.