Active Large Cap ETFs: The Best of Both Worlds? (SSAM, PMA, FWDD)
Eric Dutram: Now that the Fed has launched a third round of quantitative easing, markets seem likely to struggle in the coming weeks and months. Foreign markets are undoubtedly under pressure thanks to weakness, while a lack of further stimulus and political issues at home threaten domestic equities as well.
In this environment, many investors turn to large cap, dividend paying stocks for protection. This can generally be a good strategy as the dividends help to reduce losses while the large cap nature usually means that they are less volatile than their small cap counterparts (read Three Impressive Small Cap Dividend ETFs).
Additionally, some investors have taken another look at active management in this difficult time, even in the large cap market. Some investors are skeptical of active techniques working in the extremely liquid and well-researched large cap segment, but given the increasingly polarized market—with some large caps soaring and others pushing towards new lows—the approach could deserve a second look from many investors.
For those who may be considering a more active approach in the large cap space, there are actually a handful of ETFs that offer quality exposure to this market segment while still employing active management techniques. While these funds may not be the most popular or liquid, they could be interesting picks for investors seeking a relatively cost effective way to target only the best sectors and stocks in the American economy that are occupying the large cap space (read Three Biggest Mistakes of ETF Investing).
Below, we highlight three ETFs that can potentially deliver outsized returns in the active large cap ETF market. While each have their own pros and cons, any of the group could be worth a closer look, especially if you are growing concerned over broad markets and are hoping to focus in on the best of the giant caps for investment in this uncertain time:
AdvisorShares Madrona Domestic ETF (NYSEARCA:FWDD)
This product seeks long-term capital appreciation in excess of the S&P 500 index. This looks to be done by weighting securities based on consensus analyst estimates of the present value of future expected earnings, giving a very quantitative approach to FWDD’s investment process.
FWDD’s approach results in a fund that is tilted towards tech, consumer discretionary, and financials, although it does allocate a double digit allocation to healthcare, energy, and industrials as well, suggesting a well spread out portfolio. This is further confirmed by the fund’s top holdings, as no one security accounts for more than 1% of the total assets (also see The Best Bond ETF You Have Never Heard Of).
With this technique, investors can rest assured that a great deal of the market is represented, meaning that the fund can definitely be a broad market replacement for some investors. Furthermore, the product promises to have a low turnover rate which could help it be more stable—and potentially more tax efficient—than some of its peers in the active large cap world.
However, investors should note that volume is quite light, suggesting bid ask spreads may be quite wide in the product. Additionally, the net expense ratio comes in at 1.12%, meaning that it will be quite expensive when compared to its passive counterparts.
PowerShares Active Mega Cap Fund (NYSEARCA:PMA)
For one of the older active large cap ETFs, investors should look no further than PMA in their search. The fund looks to outperform the Russell Top 200 Index while managing risk by employing Invesco Institutional’s proprietary stock selection model.
This technique ranks stocks on 17 different variables while also analyzing stocks based on risks while rebalancing them on a monthly basis. Some of the many key factors that are used include earnings momentum, price trend, management action, and relative value metrics (read Three Overlooked Active ETFs).
Currently, this produces a fund that is relatively concentrated in a few choice sectors, as technology makes up just over one-third of the portfolio. Beyond that, financials, energy, and health care account for another 51% of the assets, suggesting that PMA has a heavy bias towards a few segments of the American economy.
It should be noted that the number of holdings overall is rather low at just under 50, possibly part of the reason for its relatively low fee of 75 basis points per year. Yet, much like other funds on this list, it suffers from low volume, suggesting that total costs could be far higher than what investors might expect thanks to bid ask spreads.
Rockledge SectorSAM ETF (NYSEARCA:SSAM)
For a more market neutral approach, SSAM could be an interesting pick. The product looks to generate stable and consistent returns in all market conditions by using both long and short investments in various sector ETFs.
The idea is to go long in sectors that Rockledge believes will outperform, while shorting those segments that the manager believes are due to underperform broad markets. This approach, since it uses equal dollar amounts for long and short investments, could also help to reduce overall market risk, making it an interesting pick for investors who are worried about a broad market decline but still want to be in stocks (read AdvisorShares Launches Rockledge SectorSAM ETF).
Currently, SSAM is long in financials, energy, and consumer discretionary, each making up about 33% of the portfolio. Meanwhile, on the short side, technology, staples, and health care round out the top three, although industrials, utilities and materials also make their way into the short side of the equation as well.
Like others on this list, volume is pretty light along with AUM, meaning that bid ask spreads will add to total costs. Unfortunately, this is especially a problem for SSAM thanks to its short exposure technique, pushing the net expense ratio for this active ETF up to 1.5%.
Nevertheless, for investors looking for an active approach in the large cap market, this is one of the only market neutral picks, a factor that could potentially make up for this expense problem, at least for some investors.
In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.