One of the earliest and most frequent criticism of alternatively-weighted exchange-traded funds is that when these funds outperform, it is often due to the value or small stocks factors or both.
That is a charge frequently aimed at the PowerShares FTSE RAFI US 1000 (ETF) (NYSE: PRF), one of the forefathers of the smart or strategic beta ETF movement. In fact, the creators of PRF's underlying index, the FTSE RAFI US 1000 Index, probably would not deny that the value and small stocks factors are, in many cases, primary drivers of smart beta outperformance.
Yes, advisors and investors should understand why an ETF acts the way it does, but there is such a thing as paralysis by analysis, and with the value factor rebounding this year, PRF is once again living up to its reputation as one of the premier broad market smart beta ETFs. While PRF's 1.1 percent year-to-date gain is not staggering, is about twice as good as that of the S&P 500.
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Smart Beta, Smart Investing?
“As a footnote, we also see on the ETF sponsor’s website that PRF was the 2015 winner of the 'William F. Sharpe Award for Product Of The Year,' with William F. Sharpe of course being the originator of the commonly used 'Sharpe Ratio,' which analyzes risk-adjusted performance across investment funds and methodologies. When we peel the orange so to speak, we see that the Financial sector has the largest weighting within PRF currently (by far), with a >21 percent weighting present,” said Street One Financial Vice President Paul Weisbruch in a note out Tuesday.
Holdings And Allocations
PRF's weight to financial services stocks is more than 800 basis points above its weight to the energy sector, the ETF's second-largest sector allocation. Combined, the two sectors represent just over 34 percent of PRF's weight. That is not uncommon among value ETFs these days as several of PRF's' rivals also feature energy and financial services names as their top two holdings at combined weights comparable to that of PRF.
PRF, which celebrated its tenth anniversary in December, is one of the ETFs that should be credited with bringing credibility and momentum to the smart/strategic beta ETF movement. A track record of more than a decade and $3.94 billion in assets under management confirm as much.
“Since inception, PRF has posted a three-year rolling win rate of 78 percent over its benchmark, the Russell 1000 Index. That means that over three-year rolling windows, the underlying index has outperformed the Russell 1000 Index nearly 80 percent of the time,” said PowerShares.
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