Exchange traded funds that are based on fundamental indexes have ballooned in number, but they are having a hard time attracting assets.
Exchange traded funds that are based on fundamental indexes have ballooned in number, but they are having a hard time attracting assets.
Assets among 69 ETFs pegged to fundamental indexes, almost all of which were launched within the past year, totaled just over $7 billion at the end of 2007, according to Morningstar Inc. of Chicago. Assets among all 629 ETFs totaled more than $600 billion, according to the Investment Company Institute in Washington.
Fundamental indexes use some measure other than market capitalization to determine company weightings.
Morningstar focuses on three ETF providers that provide fundamental ETFs: PowerShares Capital Management LLC of Wheaton, Ill., a subsidiary of Invesco LLC of Atlanta; Rydex Investments of Bethesda, Md.; and WisdomTree Investments Inc. of New York.
'QUANTITATIVE OVERLAYS'
RevenueShares Investor Services LLC of Paoli, Pa., last month became the latest firm to offer fundamental ETFs when it launched three funds based on indexes weighted by company revenue. But its ETFs are too new to be included in Morningstar's data.
An argument can be made that other ETF providers offer funds based on fundamental indexes be-cause the indexes to which they are pegged provide "quantitative overlays," said Jeff Ptak, an analyst with Morningstar.
But those products still tend to be cap-weighted, he said.
"I focused on those that weight names based on a different measure, like earnings, dividends and so forth," Mr. Ptak said.
Financial advisers said they aren't surprised that ETFs based on fundamental indexes are having a hard time attracting assets.
"I commend them for trying to think outside the box," Matt McCall, editor of The ETF Bulletin and president of Penn Financial Group LLC, a Royersford, Pa.-based firm with $18 million under management, said about providers that offer fundamental ETFs. "There is a place for it, but [it is] a niche market."
To be successful in attracting assets, fundamental ETFs need to appeal not only to individual investors but institutions, and Mr. McCall said he doesn't think that institutions have yet warmed to the concept.
Considering that fundamental ETFs haven't been around for long — WisdomTree, the largest such ETF provider, launched its first fundamental ETFs last April — investor reluctance is natural, said Tom Lydon, president of Global Trends Investments.
The Newport Beach, Calif.-based firm has $70 million in assets under management.
"We have yet to see the proof from a performance standpoint that fundamental indexing outperforms," Mr. Lydon said.
DIFFERENT STRATEGIES
That is a problem for investors who might be interested in a fundamental ETF but don't know which to choose.
Those ETF providers that offer funds pegged to fundamental in-dexes are tying their fortunes to vastly different strategies.
For example, PowerShares offers ETFs based on the FTSE RAFI Index Series — indexes that weight stocks based on a combination of a company's book value, income, sales and dividends rather than on its market cap.
Rydex offers ETFs pegged to equal-weight indexes.
And WisdomTree offers ETFs pegged to indexes weighted by company earnings and indexes weighted by company dividends.
WisdomTree has been the most successful firm so far to offer ETFs based on fundamental indexes.
It has more than $4 billion in assets within 39 fundamental ETFs, according to Morningstar.
And WisdomTree is probably in the best position to continue to grow, industry experts said.
Under the arrangement announced by WisdomTree on Jan. 25, Dreyfus, a subsidiary of The Bank of New York Mellon Corp.'s BNY -Mellon Asset Management unit, will co-brand and help market a line of WisdomTree ETFs in the international-cash and fixed-in-come areas.
"It's still sort of early days for [WisdomTree], but I'm guardedly optimistic," Mr. Ptak said.
E-mail David Hoffman at dhoffman@investmentnews.com.
