PowerShares FTSE RAFI US 1000 (PRF)

All Comments on PRF

  • commenter
    K. Bofah
    Sep 29 07:32 PM
    My Website
    The Dow Adds Kraft [view article]
    The Kraft pick is indeed, odd.

    Conoco Phillips is a no-go; because of Chevron and Exxon.

    Also, remember that Altria spun off Kraft and Philip Morris International. Altria was delisted after the PM spinoff. AIG folding may have been a lazy excuse to return a piece of this old conglomerate to the Dow 30.     Reply
  • commenter
    Hydrogen Bob
    Sep 24 11:59 AM
    The Dow Adds Kraft [view article]
    Is the DOW 30 really significant? And for that matter, isn't it a flawed index to begin with? The S&P500 is the true large cap benchmark of the US Markets. Reply
  • commenter
    skwestorange
    Sep 24 11:22 AM
    The Dow Adds Kraft [view article]
    Don't understand your WFC suggestion. The DJI already has BAC, C, JPM without counting AXP and GE (Half financial). That is 10% of the 30 stocks in the DJI. Need more financials?
    Reply
  • commenter
    bigmoney
    Sep 17 01:51 PM
    Three Approaches to Index Weighting [view article]
    I deployed into equities, using equi-weight, equi-sector for convenience. I much prefer doing that, than getting into mutual funds / ETFs that are top-heavy financials. This likely would have been a much better formula for getting through the 2000 tech bubble. Going into a bubble, its very difficult to determine if "this time is different", so the equi helps me sleep better at night.

    Unfortunately the deflating credit bubble seems to be taking down all stocks across the board, so its hard to pick "winners". The only refuge seems to be federal reserve notes, backed by faith & trust and a very low interest rate.     Reply
  • commenter
    falcon2382
    Aug 01 07:24 AM
    The Problem With Designer ETFs [view article]
    Timothy, I also have some objections to much of what you said, but I don't read these articles to waste my time arguing or proving that I am right, I do so in order to challenge what I take for granted and to share my thoughts with others willing to respond to comments so that we can become better investors, and as you have illustrated more than your fair share of tolerance, I want to thank you for your time and energy. But I also want to hear what you have to say about the following response to your article:

    What interests me most about your thesis is how you seem to advocate for a more "human" managed selection of stocks than for a selection of stocks chosen by a computer algorithm while admitting that market cap itself is an emotionally charged way of valuing a company (all with which I totally agree). Yet, you seem to ignore the time-oriented part of the investing process that is, by its very nature, about human decision to allocate and or reallocate funds according to perceived changes in the market. I don’t think the ETF’s take away from this human element. The formulaic, non-human, objectivity of the ETF is precisely why it is a good investment tool—it is a “control” in a world that is more than uncertain at times. In the case of SDY, which I recently purchased at $43/share, the unchanging formula is what attracts me to it. I know what I can count on. The ETF is more heavily weighted in financials than any other sector and this is why it has greatly underperformed the greater market. However, if you share my prognostication for the market moving forward, I believe many other sectors will soon be catching up with financials. This judgment is the “human” part of my investing strategy, and since I am only 25, I have a time horizon that provides ample opportunity for this imbalance to work itself out—meanwhile the dividends will compound the total number of shares I own. Further, because of the “rigid” formula of the ETF, if a company can't afford to keep its dividend or has to cut it after 25 years of increases, then it gets booted automatically. This is good because something fundamental in the company’s health has changed and unlike humans, the computer algorithm can’t find ways to justify holding on to a loser that has “broken the rule.” At the same time, the computer program also doesn’t get scared and sell a good company at a loss simply because it was taken down with its sector. But the best part is that I didn’t have to pay a transaction fee to get rid of the loser, or to buy its replacement. Yet, if there are any capital gains I am able to receive them (again without a transaction cost). And on that note, how can you not consider the dividends and management fee structure in your analysis? It’s crucial! The AVERAGE mutual fund (which is generally not actively managed either) is over 1.2%. SDY only has a management fee of 0.35%.

    Another point I’d like to address is your very comparison of SDY with the S&P 500 strictly from a capital depreciation standpoint. It was only recently that I chose to invest in SDY, and it was BECAUSE it was down so much in relation to the greater market. Or rather, it was because I realized that the ETF is more heavily weighted in financials than other broader market ETF's, but without the concentration of a strictly financial ETF, and without all the “bad eggs” (i.e. indymac, Washington Mutual, etc...). So after deciding that the financial companies that are included in SDY were among the healthiest in the industry, I welcomed the extra exposure, expecting that at some point the banks that weather this crisis will be handsomely rewarded, not only because they once again proved themselves (all of the Banks held by SDY made it through the S&L crisis and the fall of LTMC), but because they will gain market share simply by not going bankrupt. Moreover, if you want to make a comparison you should be aware of what the comparison is really telling you. What good is it to blindly compare the S&P 500 to any ETF if you don’t consider the underlying stocks? If, for example you had compared SDY to XLF you would have seen just why SDY is a compelling investment right now. At the time of this writing, the SDY boasts a dividend yield of 4.87% while XLF (a strictly financial ETF) is 4.55% (the S&P is only 1.67%). Thus, one might conclude that with SDY you get diversification with a huge dividend, exposure to the financials once they do bounce back, and peace of mind knowing that the fifty companies you own in this ETF have not only been around for over 25 years, not only paid a dividend for over 25 years, but have INCREASED that dividend during that time period. Again, I think it is relevant to remember the other crises we have been through during the past 25 years.

    I don't think it is fair to talk about ETF's as if they all have the same purpose, function, and risk/reward. If that were the case then we wouldn't need different ETF's; SPY or DIA would serve everyone's needs. I have a long time horizon and I welcome the extra dividend that SDY provides over SPY as we work our way through the current mess. In fact, this is a very very important reason (there’s the “human” part again) to consider SDY since most bear markets turnover slowly and through a basing process. When we reach that point—and I think we are there or at least very close—I expect the compounded dividends to pay me better than both treasuries and the greater equity market as I wait for the economy to find support. The S&P contains a boatload of discretionary retailers and companies that earn their money from consumer services and products, leisure activities and is it that hard to see that the energy companies which have become quite bloated recently might also drag on the S&P. The future losses of these sectors over the next year or two (or three) won’t affect SDY nearly as much as the greater market at which point SDY, I believe, will seem like a golden egg. Any thoughts?

    -Mike
     Reply
  • commenter
    Timothy
    Siegel
    Jun 30 02:08 PM
    My Website
    The Problem With Designer ETFs [view article]
    Dividend Growth Investor

    I greatly appreciate that you did not call my posting "flapdoodle."... But, if I understand it correctly, I disagree with your statement that "companies that could... ." At any moment we only know what companies have done in the past, and so a company that in the past has consistently increased its dividend, might not in the future. If enough investors start to invest based on consistent dividend increases, those companies that are forced to refrain from a past pattern of dividend increases could really get clobbered when all the dividend increase investors sell en masse when a good dividend pattern is discontinued. Also, high yield stocks tend to be vulnerable to rising interest rates. My thought is that an investor is always better off looking at everything. The best way is to observe some relationship that others have missed. I just don't see how you can hope to beat the market by being part of some huge crowd of dividend growth investors, as it seems to me that this investment philosophy has really grown in popularity over the last 10 years, and might be cresting.     Reply
  • commenter
    Timothy
    Siegel
    Jun 30 02:01 PM
    My Website
    The Problem With Designer ETFs [view article]
    Panskeptic

    "Flapdoodle"...

    I just have one basic answer, and that is: We are talkin' money here. Yes, market cap is flawed, it is horribly flawed. It has all the flaws you list. But we are talkin' money and so there will be a constant, continuing financial incentive for all players to break away from dogma and to see the falsehoods and respond. And, Timbo's rule 54.28.3, states that "People respond to financial incentives."

    Market cap is the worst, except for the rest.     Reply
  • commenter
    Timothy
    Siegel
    Jun 30 01:52 PM
    My Website
    The Problem With Designer ETFs [view article]
    Smart ETF

    Most of what you say, I agree with. But remember: I say that Market Cap is the worst system, except for all the rest (credit: Churchill). With respect to Simons, Tudor and Robertson, we really don't know how they beat the market, and to what extent they rely on weighting models, because they are extremely secretive. I accept that you construct models that beat the market for decades, but my guess is the market performance that you beat is pre-model construction. I can certainly accept that with a rearward view, you can construct models that beat the market for many decades of the past. But you are not the only one who is observing the past. Others will also respond, and this will tend to destroy those same relationships in the future. Also, my suggestion for weighting the market caps is highly qualified with, "let us theorize that there actually is some attribute ... ." I only suggest that as a superior alternative to weighting by other alternative weighting schemes that have been developed.

    Also, with respect to my democracy statement, I state, "except for resulting from a process in which each dollar, rather than each eligible person, gets a vote." So of course it is one in which the big money players, or "fat cats," are weighted much more than the average investor.

    My basic point is that every observation that you make about the market is made by others, too. So if you construct an index that takes these observations into account, your index must contend with other indexes and market actions of others who have made the same observations.

    I would like to make one qualification, however. Rather than saying "the best minds" I should have said "the best minds that the big money players have identified." There could be way better minds out there, that have just not been identified by the big money players.

    Also, if you constructed an index, decades ago, or even a single decade ago, that has consistently beaten the market since then, I would be very, very interested in seeing it and seeing how you did that.     Reply
  • commenter
    Dividend
    Growth
    Investor
    Jun 23 08:34 PM
    My Website
    The Problem With Designer ETFs [view article]
    Interesting article. You might think that these ETF's mostly based off of a backtested index are just full of hot air. I do think,however that over the long-term companies that could increase their dividends consistently over time will do at least as well as the stock market averages. Reply
  • commenter
    Panskeptic
    Jun 22 04:11 PM
    The Problem With Designer ETFs [view article]
    What a lot of flapdoodle!

    "A process based on the full set of information and constantly informed and updated by skilled human judgment."

    Is he kidding? A cuddlesome dogma, but demonstrably false. How about intellectual laziness, herd mentality and fear of independent thought? Is Mr. Siegel against the American Revolution because George III was anointed by God to be our leader? That orthodoxy makes just as much sense.

    "A full set of information?" Then how come everybody was blindsided by Bear Stearns?
    Yeah, right. That's the kind of thinking that got us into this mess.

    "Market cap is a function of democracy?" What addlepated nonsense! Market cap is a function of market cap, and there's more than one path to stock market Nirvana. It's Mr. Siegel's kind of chanting blind, lemming-like sloganeering that gives economics a bad name.

    This article belongs on a religious or archeological website, because on a scientific basis it's dead, over, obsolete, extinct, kaput.     Reply
  • commenter
    Smart ETF
    Jun 22 01:54 PM
    The Problem With Designer ETFs [view article]
    You make an argument for market cap weighting but I question several of your assumptions: 1) that Wall Street hires the best minds, 2) market distributions are accurate, 3) and that market cap represents the market. I’ve met thousands of investment professionals and most follow the heard and few do their own homework. For example, look at the bulk of the asset allocation models that use off the shelf models, like Ibbotson. These models are ridiculously flawed; in fact the founder of CAPM, Bill Sharpe, even admits that. Just because everyone is making a bet that history will forecast the future (based on a regression to the mean) doesn’t make it right. This leads to point two, most distributions fall under the Normal Distribution category which by default ignores the fat-tails. But more to your point why is following the heard a good thing? Cap-weighting is a form of market-timing because it is momentum based, like it or not. Someone is over-paying for an asset because you have more buyers chasing an asset as the price is rising. Regardless of what you believe Market Cap is a strategy and who is to say which is right? I think Rob Arnott has more than proven his point. You discuss the statistical distribution of money but you are only looking at the effect and not the cause. Much more insight can be garnered by analyzing the distribution of institutional (block) vs. non-block trading volume. Doing so you soon realize you can have more buyers than sellers and yet the price can still fall if some of those sellers are big block institutions. Watch how often the big boys are selling into the strength of the smaller volume buyers; not a pretty sight. In other words, it’s the human judgment that you endorse (perhaps based off of investor sentiment) that leads to the over-bought or over-sold conditions. I have the most trouble with your comment ‘You can’t outsmart the market by basing your distribution of money between stocks on a rigid computer analysis of part of the data.’ I totally disagree; tell this to Simons, Tudor, Robertson or most of the quant hedge fund mangers. I build models that have out-performed for decades. Maybe you should have added: ‘…using traditional models like Modern Portfolio Theory’ or something to that sort. If it doesn’t make sense to you feel free to contact me and I’ll demonstrably spell it out. More confusing to me is that you defend market cap and then later in your article start making a case for a secondary weighting to adjust for human behavior (market sentiment); isn’t this contrary to your point? Market Cap is not a function of democracy; it is a greater fool theory. If it is a democracy it is one like most countries where a few fat cats pull the strings behind the curtains and influence the tide (institutional block money flow, or worse (if you’re into the conspiracy theorist thing)). My suggestion is to not drink the random-walk cool-aid. Maybe a nice book by Benoit Mandlebrot or Nassim Taleb or anyone else that can live outside the traditionalist will change your mind. Cheers. Reply
  • commenter
    stumpydog
    May 30 11:01 AM
    Debating 'Fundamental Weighting' and Indexing [view article]
    The debate is moot considering the basic objective of the two types of funds are like comparing chickens to roosters. Your average Index fund, S&P, Russel, or any other is based on incresed valuation. Your basic fundamental indexing ETF is based on income producing yield. The best move for the average investor is to place the fundamental index funds in a tax deferred account, Roth IRA, Trad IRA, or 401 and grab the yields. Investing in traditional index funds could go either way in a tax deferred account or an open account. Diversity is still the key to making money. Reply
  • commenter
    mydoghatesca
    ts
    May 24 05:46 PM
    Debating 'Fundamental Weighting' and Indexing [view article]
    Assembling portfolios of companies ordered simply by the price a market has assigned them is perfectly fine as A method of assembling an index. But to give this method some sort of primacy seems self-evidently irrational.

    If you needed to buy 10 hens once a year, you probably you would do okay by simply going to the market, finding the 10-chicken-pen that the market has assigned the greatest value to, and buying those chickens, year in and year out.

    But what if you went back to the market one year and, in addition to just the market price, each pen had another number which was the egg yield: the number of eggs laid during the past year divided by the market price? And another number: new chickens hatched divided by the market price?

    In the former case the market has looked at all the pens and assigned each a value. This value is based part on past performance and part of future expectations. But you have no information how much of the value is based on actual performance and how much is based on expectations. In this case you have information about the entity, the chicken pen, but this information is secondary, derivative. The price is reflective of the value of the chicken pen, but it is not the value.

    In the latter case you still have this secondary, derivative information of market price assigned. But now you have additional information, and this data is primary to the object itself: egg production and fertility numbers.

    Instead of calling it a market cap index it really should be called a "high hopes and expectations" index because, though analysis on the hard fundamental data is part of the price assignation, no effort is made to order market-cap weighted indexes on anything other than that: market value. In this sense these types of indexes are ordered, by varying degrees, on the hopes and prayers of market participants.

    Ordering hens or stocks in accordance with more objective performance measures does not totally expunge the index of hopes and prayers. You are basing this ordering on past performance in the hopes that past is predictive, which often it is not. But there is no doubt less hoping and praying, and therefore more science, inside a fundamental index than inside a cap-weight index.

    There is indeed the problem that ordering indexes on fundamentals introduces overweighting to certain sectors, and these, and other problems, need to be addressed. But as we saw during the last great bubble, there were huge overweightings that happened inside of market-cap weighted indexes as well. What got overweighted was euphoria, irrational exuberance, and stocks getting priced higher and higher, growing more and more "valuable" simply because they kept going up and up, until many of the high priced chickens got their heads chopped off, ran around a little more, ran off a cliff, or simply keeled over, and died.

    Buying a market-cap weighted index isn't as uncertain as buying 2 chickens in a bush, but more uncertain than buying a fundamentally-weighted index, which is closer to buying 1 chicken in hand.

    We are always to some degree, even inside an index, picking stocks. There is a lot of slicing-and-dicing silliness going on around indexing, and more to come, but ordering and packaging securities in accordance with fundamentals such as earnings, sales, book value, or dividends is a valid way to construct an index. To do so is no less valid than ordering an index in lockstep to the values assigned to securities by a herd. Market herds can be smart, and most of the time correct, but sometimes they do stupid things. An index doesn't have to be constructed to slavishly follow them everywhere, even over a cliff, to be correct.     Reply
  • commenter
    Geoff
    Considine
    May 23 01:46 PM
    My Website
    Debating 'Fundamental Weighting' and Indexing [view article]
    Nice article Dr. DeLong! I find the whole debate on this issue rather odd. The primacy of market cap weighted indices hinges on a strong version of market efficiency. Fundamental advocates point out a body of evidence that fundamental weights such as low P/E have historically led to high performance. Frankly, I find the market cap weight folks the more odd: they are pushing for the idea of strong market efficiency despite enormous evidence to the contrary.

    To suggest that market cap weighting is 'indexing' while some other weighting is 'active' is strange. Both rely on a fairly arbitrary assumption about how to weight assets. Market cap weighting will have less turnover, which is good, but is not enough to make the case that this is the 'best' way to create a portfolio in an asset class.

    My biggest issue with fundamental indices is the way that they are promoted. Filters on fundamental value have resulted in high concentrations of certain asset classes. The dividend-focused approach tended to result in high exposure to financials, for example. Many investors did not really understand this.

    Mr. Bogles comments quoted in this article are correct, but I also find Mr. Bogle's long-term insistence that it makes good sense to own at market cap weight is not compelling.

    Cheers,

    Geoff     Reply
  • commenter
    mydoghatesca
    ts
    May 22 02:38 PM
    Debating 'Fundamental Weighting' and Indexing [view article]
    Irony: if or when everyone in the world adopts the efficient market religion and simply buys an index fund, the market will be maximally inefficient because there will be nobody left doing the head scratching analysis that supposedly renders the market efficient in the first place. So there is a symbiotic relationship between active and passive investors. Both need the other to make their version of extracting returns from the market possible. More passive investors means less stock analysis means more market inefficiency. More active investors means information is more fully, more quickly, priced, means more market efficiency. Stock pickers need indexers. Indexers need stock pickers. Both make the other's world go round. Reply
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