These ETFs are uniquely designed and structured using quantitative methods that choose stocks from diverse industries, often using less-common, but viable, investment theses.
ETFs initially became popular with traders and individual investors as tools for harnessing beta, allowing low-cost ownership of broad equity markets through a vehicle that provided transparency, intraday liquidity, and potential tax efficiency to boot.
The “first generation” of exchange traded products was exclusively plain vanilla funds that targeted well-known stock and bond benchmarks, such as the S&P 500 or Barclays Capital Aggregate Bond Index.
To the great delight of the pioneers of the ETF space, the last several years have seen ETF assets surge and adoption rates among all degrees of investors rise steadily. Assets now top $1 trillion, and ETFs often account for about a third of total trading activity.
However, to the great dismay of some of those pioneers, recent years have also seen ETFs become increasingly sophisticated and increasingly targeted. Many of the new products debuting focus on narrow asset sub-classes or implement advanced screening techniques that seem to blur the lines between active and passive management.
Others have taken a much more positive view of this innovation: the advances made in recent years have given investors access to some complex but powerful tools that have the potential to generate excess returns relative to simple cap-weighted benchmarks.
Specifically, there are a number of “quant-based” ETFs out there that use various factors to construct a universe of stocks backed by interesting, sometimes compelling, trading theses.
Direxion All Cap Insider Sentiment Shares (KNOW)
This ETF is linked to an index consisting of 100 stocks selected from the broad-based S&P 1500 that exhibit positive insider sentiment. To measure the insider sentiment of a stock, the index considers publicly available information such as purchases and sales of company stock by employees or directors reported in SEC statements and changes to analyst outlooks for the company.
The idea behind this approach is pretty straightforward: monitoring the activity of those closest to the company can provide some insights into the outlook going forward. If directors are buying up loads of shares and analysts boost their ratings or earnings expectations, it can be inferred that the “insiders” have a positive outlook. If directors are selling off shares and analysts who follow the company full time sour on the future prospects, the outlook might not be so bright.