Fans of baseball know there are two main ways to evaluate team and individual performance: the old-school “eyeball test” method and the newer practice of statistical analytics, popularized in the book (and later the film) “Moneyball.”
An analogous distinction can be drawn between ordinary exchange-traded funds (ETFs) and so-called “smart beta” ETFs. A typical ETF weights its holdings based on market capitalization, while a smart beta fund is weighted according to less visible, though still important, criteria. An example of a smart beta fund that uses the most critically important data to paint a picture of overall quality is PowerShares FTSE RAFI US 1000 ETF (PRF).
PRF’s performance matches that of an index composed of approximately 1,000 stocks screened for quality by Research Affiliates, based on four fundamental measures: book value, cash flow, sales and dividends.
Read more about this quality-focused smart beta fund at Eagle Daily Investor.