Multi-Step Approach To Evaluate Smart Beta ETFs (6/20/16)
by Bob Simpson, Synchronicity Performance Consultants
Smart Beta ETFs provide investors with an opportunity to managed portfolios, with much lower fees than mutual funds. Most Smart Beta ETFs are single factor strategies, such as choosing stocks that have lower volatility, slant the strategy in favour of value or growth or choosing stocks that have a history of increasing their dividend, buying back their shares or having a strategy of purchasing recent IPOs.
To manage portfolios using single factor investments, you need to have a process to evaluate how effective the strategy has been in the past, how performance compares to a relevant benchmark and how the strategy performs during periods of good and poor performance.
YCharts provides you with several lenses through which you can analyze ETFs. During today's Huddle, we looked at a broad range of US-listed ETFs, including many discussed in paragraph one. For this article, we will look at PKW, a stock buyback ETF.
In chart one, we look at a simple price performance chart:
PKW was in a strong uptrend until near the end of 2015. I always like to look at risk early in my analysis.
It is interesting that a basket of stocks that are buying back their shares has such a big drawdown vs. the S&P 500. Notice that in 2016, PKW dropped approximately 20% where the market dropped only 13%. You might have assumed that if these stocks were declining, the issuer bid might be holding up the value of these stocks.
Over 10 years, PKW has had strong performance against SPY.
Over 5 years, once again strong out performance. But ...
Over the past year, PKW has performed poorly vs. SPY.
For the full analysis of this ETF and others, watch the recording of today's Huddle.
https://player.vimeo.com/video/171434669
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