Quant Strategy Market Cap ETFs

by: SA Editors

Quant Strategy Market Cap ETFs List
(click on symbol for data and articles)

PowerShares Quant Strategy Market Cap ETFs
PowerShares Dynamic Large Cap Portfolio (PJF)
PowerShares Dynamic Mid Cap Portfolio (PJG)
PowerShares Dynamic Small Cap Portfolio (PJM)
PowerShares Zacks Micro Cap Portfolio (NYSEARCA:PZI)
PowerShares Zacks Small Cap Portfolio (PZJ)

What Are They?

  • Quant strategy ETFs use rules-based quantitative analysis to pick stocks, such as "overweight stocks with low P/E ratios" or "overweight stocks that have beaten earnings estimates for three quarters running".
  • The PowerShares ETFs select stocks based on undisclosed valuation criteria. The underlying stock baskets are recalibrated every quarter.
  • These ETFs aren't entirely market cap weighted. Within the market cap-defined groups, the stocks are equal weighted, with each large cap stock given a 2.5% weighting and each mid and small cap stock a 1.36% weighting.

Why & How To Use Them

  • Long term investors looking to build an ETF portfolio need to decide how many ETFs to use to cover US stocks. Fewer ETFs are simpler and more convenient; more ETFs are more expensive to buy and more effort to manage, but provide greater opportunity for rebalancing (see Further Reading below). The choices, from fewer to more numerous, are: (a) 1 Total Market ETF; (b) 2 ETFs covering growth and value; (c) 3 ETFs covering large cap/mid cap/small caps; (d) 6 ETFs covering large cap value, large cap growth, mid cap value, mid cap growth, small cap value and small cap growth; and (e) 7 or more ETFs dividing US stocks by sector.
  • Use these ETFs instead of traditional market cap delineated index ETFs if you believe that quantitative, rules-based stock selection will outperform a market cap weighted or equal cap weighted index.

What to Look Out For

  • Compared to broader index ETFs, specialty ETFs such as quant strategy ETFs tend to have higher expense ratios and wider buy-sell spreads (which makes them more costly to purchase and sell).
  • The quarterly recalibration of the stock baskets underlying these ETFs leads to higher stock turnover and therefore potentially higher trading costs and lower tax efficiency.

Further Reading

This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.

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