A Guide To Strategy ETFs

by: SA Editors

What Are They?

  • Quant Strategy ETFs provide exposure to stocks via a basket determined by rules-based quantitative analysis, such as "overweight stock markets with low P/E ratios" or "overweight stocks that have beaten earnings estimates for three quarters running".
  • When applied to foreign stock markets, quantitative rules-based investing allows an ETF to focus on certain foreign markets and avoid others.

Why & How To Use Them

  • Use these ETFs instead of regular index sector 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 passive 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 recalibration of the stock baskets underlying these ETFs leads to higher stock turnover and therefore potentially higher trading costs and lower tax efficiency.
  • ETFs that adjust weightings between different countries are hard to include in a broadly diversified portfolio, unless used in addition to international index ETFs as a way to overweight certain countries.

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.