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Quant strategy ETFs, not just for breakfast anymore

Posted by: Aaron Pressman on August 8, 2006

There’s been all too much hand wringing over the proliferation of exchange-traded funds. It’s a Darwinian finance world and those that don’t work aren’t going to do much damage. It’s hardly akin to mutual fund companies rolling out Internet funds in 2000 (a la Putnam) to draw hot (and foolish) money into bubblicious areas. Anybody started an ethanol fund yet? Some of the new ETFs seem silly but others are based on solid academic research and/or offer exposure to uncorrelated asset classes that can improve diversification.

Lately, I’ve been increasingly interested in the variety of quantitative investment strategy ETFs. Back in March, I wrote in the magazine about some, like the PowerShares Zacks Small Cap Portfolio (PZJ), which looks for stocks beating analyst estimates, and First Trust Dow Select Microcap (FDM), which uses five fundamental valuation screens. Both have outperformed the Russell 2000 small cap index over the past three months. There’s also the First Trust Advisors IPOX-100 Index Fund (FPX), which I blogged about in April. It has lagged the Russell and Morningstar’s growth fund index over the past three months.

I was reminded of all that today as I was catching up on the always thought-provoking entries on CXO Group’s blog. A ditty from last week noted that some of these quant type stock rating systems, which are often sold on a subscription basis, may work but require too much trading for individual investors to profit (Zacks was specifically mentioned). If that’s the case, an ETF seems like the appropriate package.

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