Distilling the S&P


PGIM will use active management to beat the S&P 500

PGIM is teaming up with quant firm QMA Associates to list a new actively managed multifactor large cap ETF that boldly aims to beat the S&P 500 over the long term. The PGIM QMA Strategic Alpha Large-Cap Core ETF (PQLC) will invest in US large caps chosen by QMA’s proprietary multi-factor model. Stocks are selected based on “various signals, such as value, quality and volatility, to differentiate between attractive and unattractive stocks, subject to risk constraints,” the prospectus says. With QMA’s data in hand, the investment management team then applies their own judgment to pick the final portfolio of stocks.

Analysis – brave

This fund aims to beat the S&P 500. It’s a brave and candid thing to say, most active managers wouldn’t stick their neck out like that. From what we can tell, today’s listing seems quite like the mutual fund of the same name already offered by PGIM. According to the website, PGIM’s mutual fund has underperformed the S&P by a bit over the past 10 years. Let’s see if the ETF can do a bit better.

State Street rolls out three more thematic ETFs

State Street is listing three more thematic ETFs in partnership with boutique index provider Kensho Technologies.

  • SPDR Kensho Clean Power ETF (XKCP)
  • SPDR Kensho Final Frontiers ETF (XKFF)
  • SPDR Kensho New Economies Composite ETF (KOMP)

The Clean Power ETF tracks an index that uses word searches to scan the financial statements of all US-listed stocks in an attempt to identify those in the renewable energy business. The index committee then sorts companies as either ‘core’ or ‘non-core’ depending on how involved they are in renewable energy. As is fairly typical for thematic ETFs, the fund then runs a tiered index weighting system. The companies chosen are, at first, equally weighted. But then 20% of the non-core companies weight is given to the core companies. This gives greater weight to companies more involved in renewable energy.

The Final Frontier ETF (sounds cool doesn’t it?) will invest in companies exploring deep sea and outer space – as well as those involved in other parts of the supply chain. It uses the same selection method and weighting method as the clean power ETF.

The New Economy ETF does much the same, only for companies that are “transforming the global economy through the use of existing and emerging technologies, and rapid developments in robotics, automation, artificial intelligence, connectedness and processing power.”


Distillate distills value and stability

ETF newcomer, the Chicago based Distillate Capital is teaming up with white labeller ETF Series Solutions to list a new US large cap value ETF. The Distillate US Fundamental Stability & Value ETF (DSTL) will track an index of US large cap value companies distilled by Distillate. DSTL begins with the 500 of the largest US companies, which are then screened for value based on three things:

  1. Financial Indebtedness. Companies with a lot of debt are excluded.
  2. Fundamental Stability. Companies are scored based on a proprietary measure of the volatility of their historical and projected cash flows. Those scoring in the bottom 50% are removed.
  3. Valuation. Companies are scored based on a proprietary measure of free cash flow yield.

The top 100 companies (the most undervalued) that also meet the index provider’s liquidity criteria are included.

Analysis – pretty much what we’d do

Value has been so dead for so long that some are now thinking it will never come back. Many are wondering what’s gone wrong with the value factor – has it been killed by software? By IP laws? Or was it changing accounting standards that did it?

In so far as value still has a fighting chance, we think free cash flow yield buttressed by balance sheet probes like low debt is the way to go. (The academic literature finds free cash flow a better valuation measure than book-to-price). It’s hard to fault the guys at Distillate for how they’ve crafted this investment strategy. As to how the fund performs, we’ll have to wait and see.