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Six ETFs with an interesting thesis for AMEX:ITAN by ChristopherCarrollSmith

Diversifying your strategy

There are lots of ways to “win” at investing. For diversification, it can be useful to bet on a lot of different strategies, because often when one strategy starts to go wrong, another will start to go right.

But unless you’re an expert coder with a lot of free time, you probably can’t actively manage multiple different strategies yourself. That’s where ETFs come in. ETFs can be great for diversifying your strategy without the hassle of actively managing your portfolio yourself.

In this post, I’ll look at several different ETFs that have a novel and interesting investing thesis. I don’t necessarily endorse all of these, but I think they’re worth a look.

1. The Sparkline Intangible Value ETF

I’ve been following Sparkline for a while now, and they consistently put out some of the best investing research I’ve seen. Basically, Sparkline’s thesis is that traditional metrics of value– especially the price-to-book ratio– don’t work anymore in our technology-driven economy. More and more, what determines a company’s value are “intangibles” like patents, talent, network effects, branding, and customer loyalty.

Sparkline has developed ways to “measure” each of these intangible categories. For instance, a good proxy for “talent” is how many PhDs and Ivy Leaguers are employed at a firm. Sparkline plugs these variables into a machine learning model to come up with a sense of which firms are a good “value” when you include intangibles in the calculation.

I’ve been reading this research for months and scratching my head trying to figure out how to implement it in my own investing, so I was pretty excited when they launched an ETF at the end of last month.

Top holdings of $ITAN include the FAANGM stocks, Nvidia , Intel , and Cisco. It’s tech heavy, but you’ve also got other sectors well represented, from communications and pharmaceuticals to banks, retail stores, and automakers.

We only have a few days of data for $ITAN, so it’s pretty meaningless to compare returns, but it has so far underperformed the index with a return of 1.7% vs. 3.1% for $SPY.

2. The iShares MSCI USA Momentum Factor ETF

In the scientific literature on technical analysis , one of the only indicators that seems to actually beat the market is momentum. The iShares Momentum Factor ETF buys large- and mid-cap stocks with high price momentum. Now, it may be that momentum will stop working at some point in the future, because market conditions change. But for now, it seems to work. $MTUM has returned 280% since its inception in 2013, compared to 235% for $SPY.

3. iShares MSCI USA Quality Factor ETF

Also a strong performer in the quantitative investing literature is the “quality” factor. Quality is defined as “high return on equity, stable year-over-year earnings growth, and low financial leverage.” In other words, non-capital-intensive businesses with stable growth and low debt. The $QUAL ETF does a pretty decent job achieving sector-neutral exposure to the quality factor. To be honest, it tends to be a little expensive in terms of the price multiples of the stocks it buys. Maybe wait for a dip? $QUAL has returned 212% since inception, vs. 204% for $SPY.

4. Freedom 100 Emerging Markets ETF

Let’s say you want exposure to emerging markets, but you’re worried about exposure to China or other bad-actor governments. The Freedom 100 ETF may be what you’re looking for. Heavily weighted toward Taiwan, South Korea, Chile, and Poland, $FRDM is based on quantitative econ research that shows that countries with higher “economic freedom” scores tend to experience greater prosperity and economic growth. Thus, $FRDM makes active “freedom-weighted” bets on emerging markets: “Country selection and weights are based on composite freedom scores derived from 76 quantitative variables measuring each country’s level of protection for both personal and economic freedoms.”

Think of this like the ESG emerging markets fund. Since inception, $FRDM has returned 34% vs. 32% for $EEM.

5. Pacer 100 Cash Cows 100 ETF

Companies these days use a lot of fuzzy accounting: EDITDA, adjusted EBITDA, non-GAAP earnings . Usually P/E ratios are calculated with non-GAAP earnings measures that have been heavily adjusted. This makes modeling and forecasting easier, because non-GAAP earnings are a lot less “lumpy” than GAAP earnings are. But if you want to invest based on “real” earnings and “real” value, you should really be using GAAP earnings or free cash flow. Free cash flow is the cash remaining after expenses, interest, taxes, and long-term investments. The companies that generate a lot of free cash flow are the ones that are genuinely profitable and not just profitable on paper. Investing in free cash flow is the thesis behind the Pacer 100 Cash Cows ETF .

Free cash flow can be used for capital expenditures like R&D, for paying dividends, for buying back shares, or for acquiring other companies. Having lots of free cash flow is especially beneficial in a bear market, when asset prices are cheap and credit is tight. Why? Because a bear market is a great opportunity for a cash-rich company to buy back shares or snap up assets at an extremely low price. Just look at how the Pacer Cash Cows ETF outperformed the S&P 500 during the recovery from the Covid-19 pandemic:


M&A deals and cheap share buybacks helped propel the cash cows to stardom. But you can also see that during bull markets with high valuation multiples, the cash cows have lagged. $COWZ has returned just 93% vs. 112% for $SPY. I worry that $COWZ, like lots of value ETFs, is exiting stocks too quickly rather than holding them to maturity. (Since it only holds the 100 cheapest FCF stocks at a time, it ends up only keeping the ones that stay cheap, which may be the lowest quality companies.) You might do better to just buy some of $COWZ’s higher-quality holdings and hold them forever.

6. Invesco S&P 500 Equal Weight ETF

Over the long run, the equal-weighted S&P 500 index has outperformed the cap-weighted S&P 500 index . There may be a few reasons for that.

First, base effects mean that small companies can grow faster in percentage terms than large ones.

Second, investors pay a premium for big companies because they perceive them as lower risk. But if you average the risk across a lot of small companies, it’s a lot less risky and you end up getting a discounted price overall.

Third, cap-weight indexes are kind of nuts, if you think about it. We’re going to buy the most expensive companies, making them even more expensive. We’re going to broadcast exactly what we intend to buy, and the basis on which we’re making that decision. And literally everyone in the market is going to pile into this trade.

Here’s the problem: this system can be gamed. All you need is, for instance, a subreddit full of rowdy retail traders to realize that they can pump some tiny stock like GameStop up to an extremely high market cap, and then the indexes will be forced to buy it. Cap-weighted indexes probably get bullied into buying a lot of overpriced companies like Tesla that might not actually be good value for money. Buying equal weight avoids this exploit.

What are your favorite ETFs?

I’m always on the hunt for a good new strategy or investing thesis and would love to hear from you. What are your favorite ETFs? What’s an ETF with an interesting thesis? What ETFs might be good for diversification, or might hold up well if market conditions change?

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