An Enhanced Value Strategy Gives This ETF an Edge
Rather than using a market-cap-weighted approach, PowerShares FTSE RAFI US 1000 introduces a value tilt by weighting companies based on fundamental measures.
Rather than using a market-cap-weighted approach, PowerShares FTSE RAFI US 1000 introduces a value tilt by weighting companies based on fundamental measures.
Alex Bryan: PowerShares FTSE RAFI US 1000 ETF (PRF) offers a distinctive value strategy. It invests in a broad swath of large- and mid-cap U.S. stocks. However, rather than weighting them by market capitalization as most index funds do, it assigns weightings according to fundamental measures of size, including sales, cash flow, book value, and dividends (where applicable). This introduces a value tilt in two ways: First, it causes the fund to overweight stocks that are trading at low multiples with these metrics and underweight more expensive stocks relative to a market-cap-weighted benchmark.
Secondly, fundamental weighting causes the fund to increase its exposure to stocks that have become cheaper relative to their peers when it rebalances and trim back on positions that have become more expensive. These disciplined bets against the market may help the fund more effectively profit from mean reversion in valuations than market-cap-weighted value funds. However, they can also increase its exposure to stocks with deteriorating fundamentals because accounting metrics are usually slower to pick up on that than market prices.
From its inception in December 2005 through June 2015, the fund has outperformed the Russell 1000 Value Index by 1.4% annualized. But most of this outperformance occurred during 2009, partially as an accident of timing. The fund rebalanced in March 2009, increasing its exposure to the most beaten-down stocks around the time they reached bottom. When the market started to rebound, these stocks outperformed. Had the fund rebalanced at some other time, its performance advantage probably would have been smaller. While the fund will likely have a smaller edge going forward, its disciplined rebalancing approach can still help, particularly when valuations are unusually high or low.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.