AdvisorShares continued the expansion of its suite of actively-managed ETFs this week, rolling out three products that will be sub-advised by Madrona Funds. Madrona is a relatively new asset management firm that believes simple index funds may not provide the optimal approach to investing in U.S. equities. The new Madrona products include an international equity ETF, domestic stock fund, and global bond ETF.
Madrona Forward Domestic ETF (FWDD)
This active ETF will seek to provide long-term capital appreciation in excess of the S&P 500 Index. The underlying portfolio will consist of up to 500 large cap U.S. stocks, weighted according to a unique methodology. The allocations to individual stocks will be based on consensus analyst estimates of the present value of future expected earnings relative to the share price of each security.
As such, FWDD represents another alternative to market capitalization-weighting methodologies that have come under increased scrutiny in recent years. While there are numerous advantages to a cap-weighted approach–such as low maintenance and rebalancing fees–some investors have expressed concern over the potential return drag that results from the tendency to overweight overvalued stocks and underweight undervalued companies. FWDD will employ a methodology that is forward-looking, making this ETF unique from other alternative weighting methodologies such as dividend-weighting, equal-weighting, and revenue-weighting.
For investors who believe the approach employed is capable of generating alpha, FWDD might have appeal as an alternative to large cap equity ETFs within a long-term portfolio. The expense hurdle that must be cleared to consistently add value will be significant, however; FWDD will have a net expense ratio of 1.12%, or more than 100 basis points higher than some of the cheapest ETFs available.
Madrona Forward International ETF (FWDI)
This ETF will seek to deliver long-term capital appreciation in excess of the MSCI EAFE Index, FWDI’s primary benchmark. This ETF will employ a similar forward-looking approach to the equity selection process, applying this methodology to international equity markets. The underlying portfolio will have up to 250 ADRs from the largest issuers in the EAFE region and Canada, making FWDI a potential alternative to cap-weighted EAFE ETFs such as EFA and VEA.
FWDI will also charge a net expense ratio of 1.12%, or about 100 basis points higher than the low cost VEA
Madrona Forward Global Bond ETF (FWDB)
This fixed income ETF will be benchmarked against the Barclays Capital Aggregate Bond Index, a broad-based index that serves as the basis for several popular bond ETFs. FWDB will be structured as an ETF of ETFs, using other exchange-traded products to construct a portfolio offering exposure to at least 12 global bond classes. That diversification will make FWDB unique among bond ETFs; most fixed income funds are dominated by debt of high quality U.S. issuers, concentrations that limit both the yield potential and benefits afforded by geographic diversification.
The methodology employed by the managers of this fund will also set it apart from most offerings in the bond ETF universe; whereas most funds assign the largest weightings to the largest debt issues and issuers, FWDB will utilize a weighted allocation system based on historical yield curve analysis and a mean reversion strategy. Based on an analysis of how historical yield curves compare to the current environment, certain classes of bonds will be overweighted or underweighted relative to traditional fixed income indexes.
FWDB will charge a management fee of 0.50% annually and a net expense ratio of 0.95%.
The launch of the three new Madrona ETFs brings the total size of the AdvisorShares lineup to nine, all of which are actively managed. By far the most popular of those is the Cambria Global Tactical ETF (GTAA), which has assets of about $170 million.
Disclosure: No positions at time of writing.
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