Latest news, trends and ideas for investing with exchange traded funds | ETF Commentary

Would you invest in an ETF invented by a famous professor?

That’s the question asked by Ian Salisbury in the article Beware of Professors Bearing ETFs. Salisbury points out that the track record of exchange traded funds based on ivory tower theories have delivered mixed results.

One example is the WisdomTree LargeCap Dividend Fund (DLN), an ETF designed with help from Wharton professor Jeremy Siegel.   DLN has underperformed the SPDR S&P 500 (SPY) and iShares Russell 3000 Index (IWV) over the past three years.

Salisbury also points to Yale economist Robert Schiller and the short-lived MacroShares funds that were supposed to provide exposure to housing prices but failed to gain traction.

The latest ETF with ties to a professor is the United States Commodity Index ETF (USCI) which is based on research by Yale professor Geert Rouwenhorst.

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MarketWatch’s John Spence reports that income-seeking investors are taking a second look at dividend Exchange Traded Funds.

Spence notes that investors who abandoned CDs and money markets in favor of bond yields are now anxious about potential losses in bond funds if interest rates rise.

Dividend focused ETFs highlighted in the article include the iShares Dow Jones Select Dividend Index Fund (DVY), Vanguard Dividend Appreciation ETF (VIG), SPDR S&P Dividend ETF (SDY) and WisdomTree LargeCap Dividend Fund (DLN).

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A new school of investing claims that exchange-traded funds based on the Standard & Poor’s 500-stock index, such as the SPDR S&P 500 ETF (SPY), are flawed.

The problem, according to a recent column by John Spence, is that the S&P 500 can become top-heavy with pricey shares by using companies’ market value as a way to weight stocks.

The new school is offering fundmentally-indexed funds that weight stocks by factors such as high dividend yields and low share-price-to-earnings ratios. The backers claim that these funds are less risky and offer a better chance for long-term outperformance.

Examples of fundamentally indexed funds in Spence’s column include the PowerShares FTSE RAFI US 1000 Portfolio ETF (PRF) and the WisdomTree LargeCap Dividend Fund (DLN).

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Three years after their introduction, fundamental ETFs are showing mixed results according to MarketWatch’s John Spence.

Fundamental ETFs track an index that is weighted by revenue, earnings or some measure other than market cap. Their proponents claim that funds weighted on fundamentals are less risky and have a better chance of outperformance than funds that are top heavy with pricy stocks.

Spence points out that the PowerShares FTSE RAFI 1000 Portfolio ETF (PRF) averaged a 6.7% negative return since its launch in December 2005 compared to a negative 7.1% for the SPDR S&P 500 ETF (SPY) over the same period.

However, the WisdomTree LargeCap Dividend Fund (DLN) has underperformed the market since its launch in June 2006. Dividend weighting causes funds to over expose to the financial sector which was hit hard by the credit crisis last year.

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