ETF Cornucopia: Bring Them On!

Roger Nusbaum submits: Some good questions from Seeking Alpha contributor Richard Kang about the cornucopia of new ETFs listed or in the pipeline:

He asks for my opinion about WisdomTree method of dividend weighting compared to PowerShares RAFI funds which scores companies by sales, income, book value and dividends. I just did a write up for TSCM about the Rydex equal weight sector ETFs. In the course of writing that article I saw that most of the RAFI sector funds look a lot like the Sector SPDRs in terms of weighting a $200 or $300 billion at 20% of the fund or thereabouts. These lopsided funds are quickly fading as being the best choice.

The WisdomTree funds that are out so far offer a type of differentiation that are useful in conjunction with other stocks and ETFs I use. If they are coming out with domestic sector funds, as appears to be the case, I am initially skeptical that they can be different, but I will check them out. Whereas when I first heard about their foreign sector dividend ETFs I was immediately interested, and sure enough I have used one of them in broad fashion for our clients.

Richard notes that both dividend weighting and RAFI weighting both lagged the SPX during the late 1990's.

I don't know that as fact, but I will take Richard's word and say that intuitively I believe he is correct about that. The building of the bubble may not be the best time period to benchmark against. In all of my articles for TSCM about various products that aren't heavy in mega-caps I caution that toward the end of most cycles it is the mega-caps the lead. I heard something on CNBC about only 30% of SPX components beat SPX during the bubble years. This is only true for a short time during cycles, so I put less weight on the importance of this tidbit.

Lastly he asks for my two cents on the increasing number of funds that do some sort of fundamental indexing.

I say, bring it on! More choice is a win for investors. If a do-it-yourselfer needs an ETF for energy and financials, they have maybe ten funds to look at for each. It does not seem like a stretch to think a Vanguard fund could be best for one sector while an iShares product is best for the other one. I have a couple ETFs for some clients that I will be swapping-out of in favor of newer ones that do something similar but better.

This is something I have written about for two years now; there will be better mousetraps. We have seen that recently, and I think the statement is still true looking forward.

Editor's note: New ETFs from WisdomTree include:
WisdomTree International Basic Materials Sector Fund (DBN)
WisdomTree International Communications Sector Fund (DGG)
WisdomTree International Consumer Cyclical Sector Fund (DPC)
WisdomTree International Consumer Non-Cyclical Sector Fund (DPN)
WisdomTree International Energy Sector Fund (DKA)
WisdomTree International Financial Sector Fund (DRF)
WisdomTree International Health Care Sector Fund (DBR)
WisdomTree International Industrial Sector Fund (DDI)
WisdomTree International Technology Sector Fund (DBT)
WisdomTree International Utilities Sector Fund (DBU)

Comments

[Richard Kang1:]

Thanks Roger. As I've said this in the past: we have used and still use funds from Dimensional Fund Advisors as a means to implement non market cap weighted exposure to various broad asset classes. These are considered core positions and thus do not get traded often. The only related ETF we use is RSP which Rydex launched over 3 and a half years ago. RSP is a simple add on for fine tuning US equity exposure but even in that case we've had little reason to touch it. Its rise over the past few years has been strong even with significant bumps like we saw this past summer.

I've done quite a bit of research on fundamental indexation and its different variations. We only have Claymore up here in Canada (they track FTSE-RAFI), although there's nothing stopping us from investing with WisdomTree in the US. The currency risk (and our view on the USD) is one main reason why we try to use Canadian domiciled instruments wherever possible thus my leaning towards Claymore, if we decided to go ahead with fundamental indexation. However, I am not completely sold yet on fundamental indexation as a better solution than that of DFA funds. Actually, I don't see that much difference between the two. All of them (Rob Arnott, Jeremy Siegel, Fama/French who are advisors of DFA) are simply trying to provide a de-linking of classic market cap weighted indexing. The resulting portfolio composition and performance may not be significantly different in most cases. The fact that DFA has been doing this for decades provides me a greater level of comfort. The new offerings provide a different approach and intraday trading. Perhaps as the new ETFs in fundamental indexation increase in terms of diversity (coverage of more countries and industry sectors) as we've seen lately, it might attract more attention. I just don't think I'll be "in" in a significant manner. I guess I'm just at the watching and learning stage.

2006 Nov 15 10:16 AM