New York – An article in the Wall Street Journal today discusses the world of active ETFs. ETFs (Exchange Traded Funds) are funds that track particular indexes or other market characteristics, similar to mutual funds, but are exchange traded instruments. There has been a plethora of ETFs hitting the exchanges over the past several years. The WSJ sites an ICI estimate that the ETF market has grown 35% to $466.5 billion over the past year.

Recently, ETFs have been getting more specific, with some being based on alternative research providers (ARP) short lists of recommendations. The WSJ discusses one ARP which is the basis for four new ETFs – Alpha Equity Research. Given that Alpha Equity research is a quant system and is clearly rules-based, the stocks in the ETFs will be established by Alpha’s quantitative algorithms.

Basing investment decisions on alternative research recommendations is not a new idea. For example, Marshall Wace created investment portfolios, based on the best ideas of research companies, beginning about three years ago. Needless to say, though, ETFs provide much greater accessibility to the investing public.

We expect that the infusion of research-based ETFs is far from over. Recently, we learned of two other ARP ETFs from Best Independent Research and Sabrient Systems. Both of these firms developed ETFs with Claymore Securities.

BIR and Claymore launched a group of ETFs on April 3, 2007. The ETFs cover an overall top 50 Index (AMEX: BST), a Mid-Cap Value Index (AMEX: BMV) and a Small-Cap Core Index (AMEX: BES). Best Independent Research is a consortium of research providers that have combined to produce research for the Global Settlement. The companies involved are Thomas White International, Ativo Research, Channel Trend, Columbine Capital Services and Ford Equity Research. Sabrient and Claymore Launched the Stealth Index (AMEX: STH) and the Insider (AMEX: NFO) ETFs. Other firms that are the basis for Claymore ETFs are Standard & Poor’s and Zacks Investment Research.

Given our analysis of synthetic research recommendation returns, tracked by Investars, the above companies show up as some of best performers in the universe of ARPs consistently over the past 3 years.

With this new innovation in developing ETFs, we anticipate that there will be a large influx of ARP-based ETFs over the next year.

Comment by David Riedel:
Any idea how the ARP is compensated in this arrangement? Is it like running an index and earning a few bps on assets run against the index?


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