Tag Archives: guggenheim

WisdomTree LargeCap Funds: Indices Set Them Apart

Summary This is the second in my series of articles examining the field of large-cap ETFs. WisdomTree Investments’ ETFs are distinguished by their proprietary indices which are nuanced to fit specific aims. I describe the general nature of WisdomTree’s four large-cap ETFs, providing detailed information about the performance of these funds. WisdomTree Investments, Inc. (NASDAQ: WETF ) issues four large-cap ETFs under the WisdomTree Trust header: WisdomTree LargeCap Dividend Fund (NYSEARCA: DLN ) 1 WisdomTree ex-Financials Fund (NYSEARCA: DTN ) 2 WisdomTree Earnings 500 Fund (NYSEARCA: EPS ) 3 WisdomTree LargeCap Value Fund (NYSEARCA: EZY ) 4 What sets these funds apart from other large-cap ETFs are their indices; WisdomTree manages its own, proprietary, indices, assuring the funds of guidelines relevant to their purposes and hopefully structured to maximize the funds’ values. The ETFs All four funds require holdings to have a minimum of $100 million in market capitalization. 5 DLN and DTN take their holdings from the 300 largest companies in the WisdomTree Dividend Index that have paid dividends for the 12 months prior to screening; the two funds also require a $100,000 daily trading volume (average for the three months preceding screening). 6 EPS and EZY are drawn from larger universes of large-cap companies ( 500 and 1 , 000 , respectively), and both require a $200,000 daily trading average for the six months – and a price-to-earnings ratio of at least 2 – preceding screening. Eligibility for the index is determined by earnings over the four quarters preceding screening. The funds differ in two important respects: 1) specific eligibility criteria per index; 2) weighting. One thing I like very much about these funds is that their eligibility criteria are precise, even if I do not always find the criteria to be what I would like to see, but that’s my issue. The weighting systems speak directly to the focus of each fund – they do not simply go to the “default” cap-weighted system or to some other quick and easy but essentially meaningless measure. I will describe the general nature of the weighting systems as I describe each fund. 7 The average market cap in this fund is $49.5 billion, and Apple Inc. (NASDAQ: AAPL ) is the most-weighted holding in the fund. The holdings are weighted according to the company’s projected dividends for the coming year, with weighting determined by dividing a holding’s dividend by the aggregate dividends paid by all holdings – the company that pays the most cash gets the greater weight. DLN ‘s yield of 2.76% does exceed the average yield for the S&P 500 , but there should be no illusion that this is a fund that pays large dividends; all the same, just shy of $2.00 per share is very nice, and it is likely to be a steady (and steadily growing ) dividend. Expenses reported in the most recent Annual Report were a little higher than the expense ratio would indicate, and this may account for the somewhat low distribution ratio. During the most recent fiscal year the fund’s turnover rate was 12% of its average portfolio value; the larger a fund’s turnover rate, the more expenses the fund encounters. 8 DTN ‘s expense efficiency ratio (EER) of 77.40% tells a story here: the fund overran its expense ratio due to a very large turnover rate of 32% of the average value of its portfolio. 9 Nevertheless, DTN paid out a whopping yield of 3.49% ($2.45 per share). The eligibility criteria for DTN are the same as for DLN , except that DTN takes its holdings from the top-ten dividend-yielding companies in each sector except the financials. It strikes me as more effective to focus on yield rather than on cash dividends paid, as DLN does. Weighting is determined by dividing each holding’s yield by the sum of the yields of all holdings in the portfolio. This is a clever scheme, as the fund’s bias is towards those companies paying the highest yield – no doubt a substantial factor in supporting DTN ‘s excellent yield. DTN also has holdings in DLN and the WisdomTree MidCap Dividend Fund (NYSEARCA: DON ). 10 The EPS portfolio is comprised of large-cap companies chosen on the basis of their earnings ; to qualify, a company must have “generated positive cumulative earnings over their most recent four … quarters.” 11 The companies are among the 500 largest companies in the U.S., as determined by market cap. 12 Companies in the index are weighted according to their earnings in proportion to the aggregate earnings of all companies included in the portfolio. Earnings are computed using Standard & Poor’s -developed Core Earnings , which includes expenses, incomes and activities reflecting the profitability of a company’s ongoing operations. 13 EPS puts up rather nice figures: both its distribution ratio and expense efficiency rating are greater than 100%, indicating that it is minimizing its expenses and maximizing the distribution of net income. 14 Dividends, however, are a secondary concern here, as the fund is designed to hold companies that are most likely to maintain solid earnings and growth . These companies are (presumably) also likely to experience smaller losses during economic downturn. Besides the criteria mentioned at the beginning of this section, EZY holdings’ earnings per share, book value per share and sales per share must be positive . WisdomTree Investments creates a ” value score ” for each company based on EPS , BVS , sales-to-share and one-year change in stock price ; of the 1,000 largest-capped companies those with scores in the top 30% were selected for the index. 15 Weighting is based on earnings, which are computed on the basis of the companies’ adjusted net income. This is the smallest of the four large-cap WisdomTree funds and – after more than eight years on the market – it does not seem to be quite as virile as its brethren. Average daily volume is only $155K, just less than one-fifth the volume of next-in-line EPS. EZY’s holdings are not the sort to inspire a lot of confidence. A full 35% are in consumer goods, the bulk of that (22%) being consumer-discretionary industries. The following chart shows the breakdown of EZY’s portfolio: (click to enlarge) Comparative Performances The following chart shows the performances of the WisdomTree funds since their inceptions: (click to enlarge) Performance for the four funds since inception has been on the modest side, particularly if compared to the Guggenheim funds I examined in my last article. 16 In particular, the Guggenheim Russell Top 50 ETF (NYSEARCA: XLG ) had the lowest performance over this period of 55.77% – about 1100bps more than the highest-performing WisdomTree fund, DLN . The funds’ post-recession performance has been somewhat more impressive, but only marginally: (click to enlarge) While performance over the past five years has been better for these funds, the best two ( EPS and EZY ) only marginally outperform the worse of the five Guggenheims. 17 The Recession In the Guggenheim discussion I found it interesting to look at how those funds performed through the recession of 2007-2009. As I looked at the data for the WisdomTree funds, I began thinking more about the significance of a fund’s performance during the recession (and, as I discuss below, during the correction of 2015). I am formulating some thoughts about an ETF’s recession data and what it might say about the make-up of a fund; I will have more to say about this in the near future, as I collect more data. In the meantime, the following chart gives the specifics for the WisdomTree funds from 2007 through 2013: (click to enlarge) This chart traces the performance of the funds from their highest pre-recession point to their lowest recession point and then tracks how long it took each fund to reach or exceed the pre-recession high. It took two years or less for prices to collapse, but more than four years to recover. 18 Looking at the data above, it would seem that the funds based primarily on earnings and valuation seem to do a bit better than the funds focused on dividends . It will be interesting to see if this is a generalizable observation as the series continues. A curious note: EZY hit its recession low on November 20, 2008 – almost five months before the day the market as a whole bottomed. This drop seems to have been a “flash crash” of sorts, as EZY rose back up the next day, and then followed the rest of the market to the March 9 lows. It just happened that EZY ‘s November 20 low was lower than that of March 9. The WisdomTree funds compare fairly well with the S&P 500 during this period. The S&P dropped from a high of 1565.15 (October 9, 2007) to a low of 676.83 on March 9, 2009 – a drop of – 57.76% , just slightly less than the average drop for the WisdomTree funds. The 2015 “Correction” As with the 2007 – 2009 recession, the “correction” experienced in late summer, 2015, provides an opportunity to examine the nature of an ETF’s structure: (click to enlarge) There is less to go on here than was available with the recession, primarily because there has not been enough time to fully recover from the drop on August 25. However, some of the data does seem to correlate with data from the recession, with regard to the length of time from pre-correction high to correction low. During the recession, EPS suffered the least losses of the set, DLN was second, EZY third, and DTN lost the most value, at -65.11% . By August 25 (or, for EPS , September 29) EPS saw a decrease of nearly -13%, DLN was down -13.92% and DTN again dropped the most value – this time with -15.45%; the only change was with EZY , which dropped by only 10.38%. It is quite possible that, since EZY ‘s portfolio consisted of companies that presumably were experiencing suppressed valuations , that fund was less damaged by a market turn that would, in principle, have been motivated by (perceived) excess valuation. Compound Annual Growth Rate I am beginning to wonder if each group of large-cap funds will have in it a “sleeper” – a fund that seems unimpressive on the face of things, but which ends up doing quite well by itself. The following chart shows the total returns for each of the funds since inception and over the past five years: 19 (click to enlarge) Only one of the WisdomTree funds has performed consistently since inception – DLN . Since first being issued, DLN has returned 87.86% – perhaps not an “incredible” amount, but not bad. Over the past five years, its total return has been essentially the same – 88.36% . No matter whether one has held shares since inception, nine years ago, or only for the past five years, one has received 88% return on one’s investment. DTN has fared the worst, although “worst” is relative, here – DTN has offered the lowest return of the four funds over the past five years. Since inception, the fund has returned more than 102% , but over the past five years has returned 84.56% . EPS has returned only 70.13% since inception, but had an investor purchased shares five years ago, they would have seen a total return of 88.25% on their investment. With the recession behind it, this fund has started to come into its own. If any of the WisdomTree large-cap ETFs qualifies as a sleeper , however, it is EZY . Since inception, this fund has returned only 53.55% – I think that qualifies as fairly low. However, over the past five years, EZY has returned nearly 90% over its initial value in December, 2010. The following graph shows the CAGRs for the four funds over the two periods being considered: (click to enlarge) All things considered, these four funds have been fairly indistinct over the past five years. Assessment While EZY looks fairly intriguing when considered from the five-year perspective, when all is said and done, DTN pulls clearly ahead of the pack, with DLN and EPS not too far behind, in that order. EZY does not score well in many of my criteria, and ends up quite a distance in the back. If I were looking for dividend income , DTN would be high on my list (of the funds discussed here); if growth were the aim, I believe EPS would have to get the nod. All things considered, however, I would likely turn to the Guggenheim funds before I would choose one of the WisdomTree funds – at least, as it stands for now. Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the Company’s Prospectus, Statement of Additional Information, and fact sheets. All tables, charts and graphs are produced by me using data acquired from pertinent documents; historical price data from Yahoo! Finance . Data from any other sources (if used) is cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. ——————————- 1 DLN homepage. 2 DTN homepage. 3 EPS homepage. 4 EZY homepage. 5 WisdomTree Trust Prospectu s , August 1, 2015. The $100 million figure is apparently generalized to take into account all of WisdomTree’s funds. In general, the large-cap funds seem to have holdings with capitalization of more than $1.6 billion each. 6 Prospectus , pp. 10 & 14. 7 The Prospectus for the funds goes into great detail in explaining how the weighting process is executed. 8 WisdomTree Trust Annual Report , March 31, 2015. Distribution ratio compares the actual distributions made to those that would be projected on the basis of net income as reported in the Annual Report. Some deviation may be expected, since my figures reflect yield ttm, which may extend beyond the period covered by the Annual Report. 9 See Prospectus (5, above), p. 10. 10 However, holdings in DLN and DON are small, at 0.03% each of DTN ‘s NAV. 11 Prospectus , p. 38 12 According to the WisdomTree Earnings Index . Prospectus , p. 38. 13 Prospectus , p. 39. 14 I calculate the “expense efficiency rating” by dividing actual expenses paid into the product of the fund’s NAV and its expense ratio. “Distribution ratio” is determined by dividing the actual dividends paid by net income per share. If a manager is keeping expenses down, and making large distributions, both figures represent results exceeding expectations. Any figure over 100% should be considered very favorable. 15 Prospectus , p. 50. 16 ” Changes Coming For Guggenheim Large-Cap ETFs .” Coincidentally, a chart for the Guggenheim funds is shown there covering essentially the same period as the one above – 2006 – present. 17 A five-year performance chart was not presented in the Guggenheim article, but has been made available here . 18 I can see why an investor might find it hard to hold onto stocks when going into a recession, since the recovery seems to be protracted (and, according to then-Treasury Secretary Tim Geithner, the recovery from this last recession was quicker than usual). Cutting one’s losses early, then re-investing once the bottom is neared, may seem to be an effective way to avoid extended losses. But the devil’s in the details: when is it “official” that the economy is entering a recession, and when has the economy bottomed out? I don’t think there are any hard and fast answers to either of those questions. 19 Share prices reflected in the graph have been adjusted to reflect dividend payments.

Changes Coming For Guggenheim Large-Cap ETFs

Summary This is the first in a series of (free-standing) articles analyzing the 121 large-cap ETFs that are currently available. Guggenheim currently has five large-cap ETFs, although one will be closed in January and another will be changing its index provider. I rank the five ETFs and come to some interesting conclusions about which of Guggenheim’s funds seems to be the best. In one of my recent articles, 1 I mentioned that a serious all-ETF portfolio needed to have at least one fund focused on U.S. large-caps. Which one? As of this writing, there are 121 ETFs that direct their attention to large-cap holdings, many focusing on the S&P 500 , the Russell 1000 or any of the variants of those two basic indices. 2 Is there a fund that could be said to be, in some meaningful sense, better than the others? Or, at least, is there some identifiable group of funds that seems to be – again, in some sense – better, from amongst which one could choose with a bit of confidence? I propose to do a long-term project involving the comparison of large-cap ETFs. My goal will be to identify funds that have promise, while at the same time identifying funds that might not be as tempting as others. Each article will be restricted to a handful of funds that have something in common (issuer, index, methodology, weighting, etc.); over the course of the project, no doubt some funds will show up more than once. In the end, it is not my expectation that there be one special fund that I hold up as the ” winner ,” but that readers will have some cogent discussions that may help separate the wheat from the chaff. Hopefully, there will be some surprises along the way just to keep things interesting. Along the way, I hope to develop some tools that will help in examining the group of large caps, and possibly help shed some light on other classes of funds, as well. 3 The articles are intended, and expected, to be independent from one another, so readers need not feel that they have to commit to the whole series. 4 The Guggenheim Large-Cap Funds Guggenheim Funds Distributors, LLC currently offers five ETFs that focus on U.S. large caps: Guggenheim Russell 1000 Equal Weight ETF (NYSEARCA: EWRI ) Guggenheim S&P Equal Weight ETF (NYSEARCA: RSP ) Guggenheim S&P 500 Pure Growth ETF (NYSEARCA: RPG ) Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) Guggenheim Russell Top 50 ETF (NYSEARCA: XLG ) A couple of changes are in the works for two of the funds and will be discussed in due course. Below is a brief description of each fund. EWRI is one of the two Guggenheim ETFs that will face changes on January 27, 2016: this fund will effectively cease to exist , its portfolio will be merged with RSP . Guggenheim’s reason for the merger is that the Russell 1000 is not a pure large-cap index , but includes a substantial number of mid caps, as well. As a result, EWRI – which is intended to be a large-cap fund – overlaps with Guggenheim’s mid-cap ETF and is considered by Morningstar to be a mid-cap blend. 5 According to Guggenheim, after the change, the company’s large-cap, mid-cap and small-cap funds will be distinct and have no overlaps. 6 Guggenheim asserts that the S&P 500 , S&P 400 and S&P 600 indices unambiguously and without overlap cover the large-cap, mid-cap and small-cap stocks, respectively. Finally, RSP has outperformed EWRI , and its smaller portfolio (500 holdings as opposed to EWRI’s 1,930 – now down to 1,023) is more efficient and more easily managed. 7 The transition will involve the flow of EWRI assets to RSP in exchange for shares of RSP ; the accumulated shares of RSP will then be distributed to EWRI shareholders on a pro rata basis, with fractional shares being distributed as cash. 8 Guggenheim expects that there should be no tax liability for shareholders. 9 The fund would seem to be going through some transition pains. Based on its current NAV and ER, compared to its 2014 expenses, it has an expense efficiency 10 rating of 126.48% – too high for a fund with only $71.19 million in assets , 11 and the merger is certain to impose more costs before the fund closes. The fund’s slight assets do provide it with a higher RoNAV . 12 When RSP’s merger with EWRI is finished, the result should not have that much bearing on this prominent ETF. EWRI ‘s assets amount to less than 1% of RSP ‘s, and ultimately they should end up simply increasing the number of shares RSP has of each of its holdings – and that , by only a small margin. I have to confess that I do like this fund – primarily for the fact that it is equal-weighted and has a tendency to outperform funds that are based on the standard S&P 500 , cap-weighted, index. I have come to think of it as my “go-to” fund when I want something to use as a comparison, or when I want to test an ETF-only investment portfolio. 13 RSP offers a nice, if unremarkable yield; as we will see below, its strong suit tends to be its performance. The fund’s managers seem to be keeping the expenses down, resulting in an EER of just under 75% – taking some of the edge off the 0.40% expense ratio. Until I get a better feel for the significance of RoNAV , I will just point out that it’s 1.11% and is towards the low end for the Guggenheim funds. 14 RPG manages to present some of the better numbers of any of the Guggenheim funds, but does so while also putting up some of the more unfortunate numbers of the group. The fund’s portfolio is made up of those in the S&P 500 that show the greatest growth potential, as determined by Standard & Poor’s . Currently, the index lists 106 companies as having “strong growth characteristics.” The fund had a 46% turnover rate for its most recent fiscal year – which is described as “average.” 15 RPG ‘s expense efficiency is very nice – only 54.50% of anticipated expenses. It does have a very low yield – not the fund to turn to if you want dividend income. The lower income also results in a low return on NAV – the lowest of the five funds presented here. RPV ‘s index consists of 123 constituents of the S&P 500 that are deemed by Standard & Poor’s to have strong characteristics regarding value. RPV is perhaps the polar opposite of its sibling, RPG . Where RPG has an extremely nice EER, RPV sports one of 103.64% – over the 100% line. On the other hand, it has the highest yield of the five funds and one of the highest RoNAV of the group. The value portfolio had a turnover rate of 25%. XLG is based on the index of the 50 largest companies (by market capitalization) in the Russell 3000 index ; ETF.com calls it “the ETF for investors who don’t want to hold any companies they haven’t heard of.” 16 The fund is the second of Guggenheim’s large-cap funds that will undergo a change on January 27, 2016; on that date, XLG will have its index changed to the S&P 500 Top 50 Index . The change, according to the issuer, is intended to maintain continuity among its funds, particularly those following S&P-based indices. There should be nominal change in the holdings of XLG (which will retain its ticker, but be renamed the Guggenheim S&P Top 50 ETF ), as it currently appears to have 48 holdings in common with the 50 S&P components having the largest market caps. 17 XLG seems to excel in most measures: it has an expense margin of 91.24% , its expense efficiency is better than 94% (along with a low 0.20% ER ), its RoNAV is a group-best 1.97% , and it has a handsome 2.06% yield. Comparative Performances So, how do they actually stack up? The following chart illustrates the performance of each of the funds since their inceptions: (click to enlarge) As the key to the chart shows, looks can be deceiving. XLG would seem to be outperforming the other four, but – since its inception in 2003 – RSP has increased by 208.81% , outperforming the other four funds, with XLG actually trailing the pack with only 62.72% increase in value. 18 Of course, measuring the funds since their inceptions is misleading, as well; RSP has a two-year advantage over XLG , and a nearly three-year advantage over RPG and RPV (and a seven -year advantage over the doomed EWRI ). The following chart shows performance from the inception date for RPV and RPG : (click to enlarge) Since March 3, 2006, the growth-oriented RPG surpasses RSP by an impressive 6,000 bps – and, again, XLG trails the others. 19 The Recession After looking at both of the above charts, I was intrigued by how the funds performed during the “Great Recession”: all of the funds hit recession-period bottoms on Monday, March 9, 2009 (although, actually, RPV hit its low on the previous Friday, March 6). By all appearances, XLG took a huge tumble, compared to the other funds. How did the funds take the recession? The following chart illustrates: (click to enlarge) Interestingly, RSP and RPV hit their pre-recession highs on June 4, 2007 ($52.67 and $37.40, respectively), while RPG and XLG hit their highs on October 10 ($39.79 and $117.32, respectively). 20 In terms of percentage, both RPG and XLG suffered the least, both losing less than 54%; RSP was about 700 bps behind, at just under 61%, while RPV lost the most, dropping more than 76%. It took 17-20 months for the funds to give up their losses; recovery, for the most part, took a lot longer. RPG surpassed its pre-recession high on October 25, 2010 – 19 months after hitting bottom. RSP would take nearly two more years before reaching a new high of $52.69 on September 12, 2012. RPV would follow in six months , hitting $37.54 in March, 2013, and XLG would reach $117.63 two months later . What I find interesting here is that these funds are all drawn from the same well: the S&P 500 . RPG , RPV , and XLG are all proper subsets of RSP , which is itself a subset of the S&P 500. The S&P reached its pre-recession high of 1565.15 on October 9, 2007 – the day before RPG and XLG reached theirs. The lowest close for the S&P during the recession was 676.83 on March 9, 2009 – the same day as the Guggenheims – for a drop of 57.76%, which places it right in the middle of the Guggenheim funds. This can give us a little insight into a few things: First , RSP lost more value during the recession than either RPG and XLG presumably because RSP has significantly more smaller-capped companies. How do we come to that conclusion? Because RSP underperformed the S&P 500, even though the two would be (in principle) co-extensive, the only difference being that the S&P is cap weighted, while RSP is equal weighted. Being equal weighted, RSP places greater weight on the smaller-capped holdings than does the S&P; thus, if RSP underperforms the S&P, it would be reasonable to assume that the principle cause was the extra weight given the smaller-capped companies. Second , if smaller large-cap companies bore significant losses during the recession, we can assume that the reason for RPV’s performance during this period would be due to a larger number of smaller-capped holdings. This only goes so far as an explanation, in that there is an overlap between these funds: RPG and XLG have 17 funds in common, while RPV and XLG have eight in common (meaning some of the mega-caps are, according to S&P’s formulary, still values). 21 Third , Standard & Poor’s formula for determining growth stock seems to be spot on, as RPG recovered from the recession quicker than the other three funds, and did so by a substantial margin. I take it by “growth” they mean “quick growth” – sprinkle some Miracle-Gro on them. The 2010 “Correction” Given the performances of these funds during the recession, I thought it might be interesting to see how they fared during the recent “correction” the market experienced recently. The following chart gives an indication: (click to enlarge) The chart shows fund performances for the period from June 1, 2015 through November 20, 2015 (the prices on the far left and far right of the chart). It also shows the highest point and lowest point for each fund (the dated prices) – with all highs coming before August 25, the day “the bottom dropped out.” All four ETFs lost more than 10% of share value from their respective highs, with RPV losing the most at 15.79%. For the period illustrated, only one fund – XLG – has shown a gain in share price overall. Needless to say, none of the funds had surpassed their high points for the period. 22 Compound Annual Growth Rate (CAGR) One last consideration ought to be made before trying to “judge” these funds: what one gets from them. The following chart shows returns based on historical prices adjusted to accommodate splits and dividends: (click to enlarge) When we take into account dividends, and particularly when we look at share performance since March 9, 2009, RPV shows a measure of life it hasn’t shown thus far. The value fund’s group-leading yield pushes its fairly modest performance in all other measured data to a post-recession growth of 552.34% , outperforming nearest contender RPG by 213 percentage points. Another way of quantifying the returns realized by these funds is through their CAGR s. The following graph shows the CAGRs for each fund (including EWRI ) computed both from date of inception ( CAGR-I ) and for the five-year interval from November 20, 2010 to 2015 ( CAGR-10 ): (click to enlarge) Head-to-head over the past five years, RPV has markedly outperformed the other funds – again, largely due to its dividend yield. Of course, CAGR data can be misleading, in that it the annual returns each fund would provide as if growth was a constant , which it is not. Nevertheless, however, it is an effective way to illustrate the total returns one might expect from a holding. As illustrated above, moreover, it can show that all of the funds have realized a greater rate of growth in the past five years than is historically the case. Assessment I have to confess that I still have not worked out a way of rating the funds in some way that would be meaningful once all 121 ETFs are put together. For the time being, I am simply weighing each component of the analysis, 23 with each component bearing an equal weight – essentially, scoring is based on ordering for each component. I am trying to keep it simple, in the absence of something cogently complex. Of the five funds considered here, XLG comes out on top, with RPV just nominally behind – and this pretty much sums up two prominent approaches to investing: for growth/security [ XLG ] or for income [ RPV ]. I must confess to being slightly surprised that RPV ended up scoring as high as it did – this may be something of a sleeper. RSP and RPG tied for third place, each one showing its strengths in line with RPV and XLG , respectively. RSP was stronger on the income -based factors, while RPG was stronger in the growth elements. I am somewhat disappointed in how RSP fared. Disclaimers This article is for informational use only. It is not intended as a recommendation or inducement to purchase or sell any financial instrument issued by or pertaining to any company or fund mentioned or described herein. All data contained herein is accurate to the best of my ability to ascertain, and is drawn from the Company’s Prospectus, Statement of Additional Information, and fact sheets. All tables, charts and graphs are produced by me using data acquired from pertinent documents; historical price data from Yahoo! Finance. Data from any other sources (if used) are cited as such. All opinions contained herein are mine unless otherwise indicated. The opinions of others that may be included are identified as such and do not necessarily reflect my own views. Before investing, readers are reminded that they are responsible for performing their own due diligence; they are also reminded that it is possible to lose part or all of their invested money. Please invest carefully. 1 ” QLC: Large-Cap ETF With High-Quality Stocks .” 2 Not counting ETNs (of which there are about six) or leveraged/inverse funds (of which there are ~ 27). 3 I have discussed one such tool already, when I introduced “expense margins.” As I prepared this article I came across two more: return on NAV ( RoNAV ) and expense efficiency rating ( EER ). RoNAV has appeared in a few of my recent articles, and reflects the relationship between NAV and the net income generated therefrom. EER is meant to capture the difference between the expenses actually paid in a fund and the expense ratio on which many investors place great weight. A discussion of what these data represent – and how they are determined – can be found in my blog . 4 Of course, I will not discourage you from reading all of the articles if your tolerance for boredom is sufficiently high. 5 The Guggenheim Russell MidCap Equal Weight ETF (NYSEARCA: EWRM ). EWRM will change index to the S&P MidCap 400 index on January 27, and will become the Guggenheim S&P MidCap 400 Equal Weight ETF (EWMC). 6 Transition of Guggenheim ETFs to S&P Dow Jones Indices, a list of key considerations and FAQs. The Guggenheim Russell 2000 Equal Weight ETF (NYSEARCA: EWRS ) will become the Guggenheim S&P SmallCap 600 Equal Weight ETF (EWSC). Available here . 7 ETF.com adds some additional considerations to the reasons for the merger: 1) EWRI has not traded well, with only an approximately $216,410.00 in average daily volume (compared to RSP ‘s $64.14 million average); 2) on December 23, 2014, PowerShares issued an ETF identical to EWRI – the PowerShares Russell 1000 Equal Weight ETF (NYSEARCA: EQAL ). Implied – there’s not enough market for the ETFs to support two funds. 8 Per ETF.com . 9 Guggenheim FAQs, note 4, above. 10 See EER in note 2, above. 11 An EER > 1 means that it is spending more on expenses than “anticipated” in its expense ratio. 12 See RoNAV in note 2, above. 13 I gave the fund a thorough going-over in ” Guggenheim s RSP: Equal Weight Or Dead Weight? ” I used it for comparison purposes in the QLC article mentioned above, and as a component for a trial portfolio in ” Brown s Permanent Portfolio Vs. Porter s ETF Retirement Portfolio .” 14 Of course, as with any figure related to returns, higher is usually going to be better, but I do not expect to have a clear indication of what sort of RoNAV to expect from large-cap ETFs until I have gotten further through the project. 15 Guggenheim ETFs Prospectus, p. 6. 16 ETF.com . 17 The index itself does not appear to be available yet, and I based the comparison on a list of the top 50 S&P 500 companies generated in finviz.com . 18 On April 27, 2006, RSP underwent a 4-for-1 split. I have adjusted the prices prior to the split to reflect one-fourth of their actual value. 19 I have dropped EWRI from this and subsequent charts because: a) its performance has not been that impressive, and anyway, b) it will cease to exist in less than two months. 20 All prices are closing prices as of the day cited. 21 There are no overlaps between RPV and RPG , and this is why they are considered “pure” – the formula that determines if a holding is a value stock excludes the possibility of a growth stock being included, and vice versa. Since no specific formula is needed (in principle) to determine which stocks have the largest market capitalization, there is no consideration given to “value” or “growth” conditions. 22 XLG did come close on November 3, when its price closed at $148.31 – missing the high by $0.46. 23 Expense margin, expense ratio, expense efficiency rating, return on NAV, yield, and the two CAGRs. I am also considering counting the recovery period from recession and some meaningful assessment for performance over the recent correction.

FXZ And RTM: Material Evidence

Summary An opportunity for long term investors to be pre-positioned in the materials sector. One fund is equally weighted, conservatively invested; the other more diversified and alpha weighted. Either fund challenges the investor to take advantage of the business cycle. There’s an old Wall Street adage to ‘buy low, sell high’ and based on the basic principles of investment, this statement is axiomatic. However, it does beg the questions, ‘how low is low?’ and ‘how high is high?’ So to apply this axiom, the idea would be to find an investment that is low. Anyone who has paid attention to global financial news over the past few months is well aware that the supply of strategic materials, as well as production, has run far, far ahead of demand. But just what is the ‘materials sector’? According to Investopedia : … A category of stocks that accounts for companies involved with the discovery, development and processing of raw materials. The basic materials sector includes the mining and refining of metals, chemical producers and forestry products. .. So apparently, this is a starting point: supply is high, demand is low therefore prices decline, thus profits, thus stock prices of ‘basic materials’ producers. (click to enlarge) Unless one has the time, effort, patience and knowledge to analyze and filter through the hundreds, if not thousands of global basic materials manufactures, it best to select a basic materials ETF and then a ‘plain vanilla’ one at that. Lastly, the individual would be wise to select the best fund in the class. By filter U.S.Equities => Basic Materials=> All, then excluding ‘Leveraged’, ‘Inverse’ and ‘ETN’, the very handy Seeking Alpha’s ETF Hub tool identifies nine suitable results. There are two candidates with a “least bad” one year performance and the best three year performance. First is the Guggenheim’s S&P Equal Weight Materials ETF (NYSEARCA: RTM ) and second is the First Trust Materials AlphaDEX ETF (NYSEARCA: FXZ ) . According to Guggenheim , the investment’s objective is to: … replicate as closely as possible, before fees and expenses, the performance of the S&P 500 Equal Weight Index Materials[S15] … Clearly, the 28 component holdings of the Guggenheim Materials fund are then equally weighted and readjusted quarterly according to the index it tracks. The underlying S&P tracking index: …imposes equal weights on the index constituents included in the S&P 500 that are classified in the GICS® materials sector… (Note that ” GICS ® ” is an abbreviation for G lobal I ndustry C lassification S tandard , developed by S&P and M organ S tanley C apital I nternational ). (click to enlarge) The First Trust fund’s investment objective: … is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the StrataQuant® Materials Index [STRQMT]. .. This is an: … enhanced index developed, maintained and sponsored by the NYSE Euronext or its affiliates which employs the AlphaDEX stock selection methodology to select materials stocks from the Russell 1000 Index .. The AlphaDEX methodology , as the name suggests will identify index components with the greatest potential for capital appreciation. In plain speak, the fund will weight companies in the sector which are performing better than the average company in the sector. So instead of just trying to just replicate the index, it weights its holdings more towards the best performing stocks. (click to enlarge) Observe though that both funds have performed similarly in both good and bad market cycles, but interestingly, the Guggenheim fund conservatively equally weights its holding whereas the First Trust Funds weights slightly more towards risk. The Guggenheim Fund has a far more simple subsector allocation construction, five in all and then most heavily weighted in Chemicals at 57% of the fund’s total holdings. The First Trust fund allocates among ten subsectors, also most heavily weighted in Chemicals, 34%, but also includes an allocation for Aerospace and Defense, 5%, normally part of the Industrial Sector. (click to enlarge) (data from First Trust and Guggenheim) Both companies, as might be expected, have holdings in common; 21 in all. These are listed by First Trust’s weightings; (since Guggenheim equally weights): Holdings in Common Name and Symbol FXZ Weighting SEALED AIR (NYSE: SEE ) 3.47% MARTIN MARIETTA (NYSE: MLM ) 3.12% VULCAN MATERIALS (NYSE: VMC ) 3.03% NEWMONT MINING (NYSE: NEM ) 2.70% The MOSAIC (NYSE: MOS ) 2.61% NUCOR (NYSE: NUE ) 2.42% LYONDELLBASELL (NYSE: LYB ) 2.26% ALOCA (NYSE: AA ) 2.25% DOW CHEMICAL (NYSE: DOW ) 1.89% SHERWIN-WILLIAMS (NYSE: SHW ) 1.89% EASTMAN CHEMICAL (NYSE: EMN ) 1.86% CF INDUSTRIES (NYSE: CF ) 1.65% BALL CORP (NYSE: BLL ) 1.24% AIRGAS (NYSE: ARG ) 1.18% E.I. du PONT de NEMOURS (NYSE: DD ) 1.11% WESTROCK (NYSE: WRK ) 0.76% ECOLAB (NYSE: ECL ) 0.68% AIR PRODUCTS & CHEMICAL (NYSE: APD ) 0.65% PRAXAIR (NYSE: PX ) 0.58% INTL PAPER (NYSE: IP ) 0.56% PPG INDUSTRIES (NYSE: PPG ) 0.53% Data From First Trust and Guggenheim As a general rule, the investor should take the time and trouble to compare the holdings of any ETFs in the same asset class for a reason exemplified here. Of the 28 holdings of the Guggenheim Fund, only 7 are not in common with the First Trust fund. Of those 7, four are in the Chemical subsector, 2 in Containers & Packaging and one in Metals and Mining. Further, as mentioned above, the Guggenheim fund seems rather heavily weighted in Chemicals compared to the First Trust fund; 57.06% vs. 34.09%. In Containers & Packaging the Guggenheim fund is slightly more weighted than Firsts Trust; 18.17% vs. 13.25%. First Trust is a little more weighted in Metals and Mining; 14.23% vs. 20.10%. Lastly, by applying some simple arithmetic, the average weighting of the First Trust’s holding which are not in the Guggenheim fund is just over 2%. The equally weighted unadjusted Guggenheim holding averages 3.57%. The point being that Guggenheim fund is mostly contained in the First Trust fund in terms of holdings, similar in allocation and reasonably close in average weighting. Also as noted above, the First Trust fund has two Aerospace & Defense holdings, 4.69%; a subsector more properly defined as an Industrial subsector. One is Hexcel Corporation (NYSE: HXL ) and the other is Precision Cast Parts (NYSE: PCP ) . In the case of these two companies, the sector to which it belongs just might be a matter of perspective since both companies manufacture specialized materials . Hexcel manufactures: … everything from carbon fiber and reinforcement fabrics to pre-impregnated materials… …and honeycomb core, tooling materials and finished aircraft structures … Precision Cast Parts, as the name implies, manufactures precision and complex casting using high performance nickel and titanium alloys. Hence, although classified as Aerospace and Defense companies, they do produce materials used in industry so are appropriate holdings for a materials fund. Fund and Inception Expense Ratio 1 Year Return 3 Year Return 5 Year Return TTM Yield P/E 3 Month Average Volume Beta Guggenheim [RTM] 11/1/2006 0.40% -7.48% 11.67% 10.78% 1.54% 17 12020 1.09 First Trust [FXZ] 5/8/2007 0.70% -11.43% 9.36% 10.65% 1.57% 17 85131 1.08 (Data from YaHoo!, Guggenheim and First Trust) So what it boils down to is this. RTM is investing conservatively in this volatile sector. FXZ may be viewed as an extension of RTM, with the opportunity for capital appreciation. However, in doing so its accepting a little more risk in this volatile sector. Both are good choices, but the decision of which to choose depends on the risk tolerance of the investor. Having described both funds, the original point must be reiterated: Is this the time to buy into the Material Sector? By referring to the included price divided charts, it is evident that both funds are well off their lows, both lows having occurred in the recession year of 2008. Hence both funds appreciated during the recovery years, in particular those years for which emerging market nations created a seemingly insatiable demand for materials. If those emerging market nations are correcting towards a more sustainable growth rate, then the Materials sector correction may not yet be over. However, this is precisely what is meant by the ‘business cycle’. Eventually, excess supply will be worked down and production capacity will adjust accordingly so that supply and demand will again come into balance. Hence, for a risk tolerant individual investor, a gradual accumulation in the materials sectors, in particular, by patiently dollar cost average in over a long period of time will put the investor in an advantageous position to be able to take advantage of the next, inevitable, up cycle and put to the test the old adage, buy low, sell high.