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CLS: Beating Broad Market Averages with Smart Beta ETFs


Smart beta ETFs continue to serve a more important role in CLS portfolios. In fact, CLS is one of the largest users of smart beta ETFs within the ETF industry. Why is that the case? Smart beta ETFs are unique because they provide a clever way to access targeted investment exposures that capture the essence of what many investors look for in an active manager. These ETFs are generally designed to use a set of rules to determine the securities held in the portfolio without allowing for subjective judgement and style drift to come into play.

One such ETF that CLS has been allocating to extensively, in order to increase our smart beta exposure to value, is the PowerShares FTSE RAFI Emerging Markets ETF (PXH). PXH is unique in that it doesn’t simply stick with one valuation characteristic to define whether or not a company is cheap or expensive. Each stock in the targeted universe is measured based on how cheap or expensive it is relative to book value, cash flows of the firm, revenues generated by the firm, and dividends paid. This information is aggregated into a composite score for each stock, which then fundamentally weighs each security based on its composite score relative to the rest of the target universe.

So, what is the takeaway from this? Investors should know that CLS continues to enhance the way we deliver value, not just with Risk Budgeting and active asset allocation, but also by security selection within the ETF universe. Smart beta ETFs provide useful tools to go beyond investing in the averages associated with a broad market index. In many ways, they provide the best of both worlds — the intelligent insight of rules-based active management and the consistency and low cost of passive investing.

The Russell 3000 Index is an unmanaged index considered representative of the U.S. stock market.  The index is composed of the 3,000 largest U.S. stocks. The S&P 500® Index is an unmanaged composite of 500-large capitalization companies.  This index is widely used by professional investors as a performance benchmark for large-cap stocks.  The Russell 2000® is an index comprised of the 2,000 smallest companies on the Russell 3000 list and offers investors access to small-cap companies. It is a widely recognized indicator of small capitalization company performance. The MSCI All-Countries World Index, excluding U.S. (ACWI ex US) is an index considered representative of stock markets of developed and emerging markets, excluding those of the US. The MSCI EAFE Index is a composite index which tracks performance of international equity securities in 21 developed countries in Europe, Australia, Asia, and the Far East. The MSCI Emerging Markets Index is a composite index which tracks performance of large and mid-cap firms across 21 countries classified as emerging market countries.  The Barclay’s Capital U.S. Aggregate Bond® Index measures the performance of the total United States investment-grade bond market. The Barclay’s Capital 1-3 Month U.S. Treasury Bill® Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities and represents 20 commodities that are weighted to account for economic significant and market liquidity. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general.  You cannot invest directly in an index.

The graphs and charts contained in this work are for informational purposes only.  No graph or chart should be regarded as a guide to investing. This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument.  There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss.  This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report.  Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  Investors should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Individual client accounts may vary.  Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies.

At certain places, we offer direct access or ‘links’ to other Internet websites. These sites contain information that has been created, published, maintained or otherwise posted by institutions or organizations independent of CLS Investments, LLC (CLS). CLS does not endorse, approve, certify or control these websites and does not assume responsibility for the accuracy, completeness or timeliness of the information located there. Visitors to these websites should not use or rely on the information contained therein until consulting with their finance professional. CLS does not necessarily endorse or recommend any product or service described at these websites.



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