Tuesday, June 13, 2006

New ETFs from Claymore, Zacks, and Sabrient

Claymore has filed a preliminary prospectus with the SEC covering five new proposed ETFs:
  • Claymore—BNY Brazil, Russia, India And China (Bric Select) Portfolio
  • Claymore—Sabrient Insider Sentiment Portfolio
  • Claymore—Sabrient Stealth Portfolio
  • Claymore—Zacks Sector Rotation Portfolio
  • Claymore—Zacks Yield Hog Portfolio

The Claymore—BNY BRIC select fund covers US listed ADRs of companies based Brazil, Russia, India and China. This fund is based on the Bank of New York BRIC Index. The index is passively market cap weighted.

The Claymore—Sabrient Insider Sentiment Portfolio is based on quantitative model from Sabrient. The quant model picks the 50 best ranked stocks on the basis of insider buying and analyst upgrades, among other factors. The fund equal weights the 50 stocks and is reconstituted at least once a quarter.

The Claymore—Sabrient Stealth Portfolio is also based on quantitative model from Sabrient. This fund focuses on stocks with less than two analysts’ providing research covering. A fairly well known market anomaly is that stocks without analyst coverage tend to outperform stocks that do have analyst coverage. This is believed to happen as a result of inefficient pricing caused by a lack of information. Sabrient’s model picks 250 highest-ranking stocks from a growth-oriented, multi-factor model. My guess is that fund will have a strong micro/small cap orientation, with mild underexposure to technology and healthcare.

The Claymore—Zacks Sector Rotation Portfolio, is the third ETF based on a Zacks index/model. The Zacks Sector Rotation Index is comprised of 100 stocks selected from a universe of the 1,000 largest listed equity companies based on market capitalization. The index methodology tries to overweight cyclical sectors prior to anticipated periods of economic expansion and overweight non-cyclical sectors before periods of economic contraction. This is an interesting version of the classic Valueline model of timely stocks in timely industries.

The Claymore—Zacks Yield Hog Portfolio is IMHO the most interesting. The index is intended to beat the Dow Jones US Select Dividend Index, the basis for iShares (DVY) etf with over $7 billion in assets. The Yield Hog index includes US stocks and ADRs that pay dividends, as well as REITs, master limited partnerships, closed-end funds and traditional preferred stocks. This is the first ETF with a mandate to explicitly invest in MLPs and traditional preferred stocks. With access to higher yielding assets, I expect that this ETF will easily have higher dividends than pure equity income ETFs.

The Zacks Yield Hog index is comprised of approximately 125 to 150 highest-ranking securities chosen using a rules-based quantitative ranking methodology from Zacks. Half of the index will be made of dividend-paying common stocks. Closed-end funds are limited to 10% of the portfolio. Master limited partnerships may make up one-quarter (25%) of the portfolio. Exposure to all other categories of investment type (ADRs, REITs and preferred stock) other than U.S. common stock are limited to a 20% maximum per investment type.

These new ETF’s from claymore are part of growing trend towards semi-active ETFs that are designed for superior investment performance. The Zacks Sector Rotation Portfolio is the first “macro” ETF which explicitly attempts to make investment decisions based on macroeconomic factors. I think we will see more “macro” and dynamic allocation ETFs in the future.

The BIRC ETF may be attractive to investors seeking concentrated exposure to this subset of EEM. Given the high volatility of emerging markets in recent weeks, there are probably less investors seeking exposure to EEM at the present time. This ETF will probably be a component many portfolio’s with macroeconomic focus.

The Sabrient quant models are untested at this time. However each model is based on real phenomena. The informational content of insiders actions and the ignored/unloved effect. Time will tell if Sabrient has been successful at exploiting these known market anomalies.

The Zacks Yield Hog ETF is the most interesting one to me. I like dividends. Zacks’s is acknowledging that fact that if you like dividends, common stocks in general are not the place to find them. DVY only yields about 3.2%. You can do better with an online high yield savings account. If half the portfolio is investing in dividend payers yielding 3.2% and the remainder is invested in REITs and what not yielding upwards of 7.5%, the total ETF should yield around 5% or more. Because of the Yield Hog ETF’s investment in REITs, MLPs, closed end funds, and foreign stocks it should have low correlation to the broader US market while paying out much more.

Tip of the hat to IndexUniverse.com for breaking the story.


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