WC Whiner

Finding Value in the Fundamental Index ETFs

Sorry, I had to give you 1 star. An analysis of investment management with no discussion of fees is like talking about the Bugatti Veyron without mentioning its price tag. PRF charges you 60 bps, while VTI charges 7. In order to make the former worth your while, you need to be convinced it will outperform the broad market by over 0.5% per year -- quite an alpha for a mechanical management style.

Now, Arnott claims 200 bps of alpha, which would make his vehicle more than worth its fees. I am skeptical, for the obvious reason that that much alpha just shouldn't be available to a mechanical strategy. Indeed, seekingalpha itself carried the FAJ critique of his backtest, noting, "A Fama-French 3 factor regression shows the Fundamental Indexes have exposure to the value factor and, to a lesser extent, the size factor. Accordingly, the Fundamental indexes, net of the value and size factors, earned an estimated alpha of -0.1 percent."

Bored, I did a quick regression. PRF does indeed show a nice alpha vs VTI since inception, ~0.1% per week, which is awfully nice work after fees. I predict it won't last past the next few years, but if it does, I shall be only too glad to eat my words.