My name is Som Seif and I am President and CEO of Claymore Investments. I recently was made aware of your discussion panel and have had a chance to read through the different comments. Let me start off by saying what you are doing is great, you are providing much needed information to the investing public, in an informative and thought provoking manner.
What I have been reading has been very interesting but I would like to offer some more information so that your discussions will be accurate.
Claymore Investments is an investment company that strives to make the best products available both for the investor and the advisor. We believe ETF’s are the best investment vehicle out there and we also believe that research based indexes, deeply rooted in quantitative market approaches offer investors more choice as well as the ability to potentially outperform the traditional benchmark indexes.
We are not Barclay’s and we choose not to be. Barclay’s offer ETF’s that provide traditional market-cap weighted indexes and market exposure with a low fee (0.17% MER XIU’s, but between 0.50% – 0.55% MER for other Canadian ETF’s); and they are good at what they do!
Claymore ETFs look to provide strategy driven ETFs and look to add value on traditional indexes by actively choosing the factors that a passive index is created from, hence Fundamental indexes. That is why we have partnered with Rob Arnott, and Research Affiliates, they are providing a value add over traditional indexes. Rob’s reasoning is sound, but no one can predict the future performance.
Now from what I can see there is a very healthy discussion on what Fundamental Indexing is about and why it works/doesn't work. Fundamental Indexing is based on the theory of severing the tie of a stocks market price and the weight the stock has on the index. It is designed to try and avoid the main issue with market cap indexing which is overweighting 100% of the overvalued stocks and underweighting 100% of the undervalued stocks in an index. Fundamental Indexing does not claim to make active decisions or know what is overvalued or undervalued, only that by randomizing the errors (and not directly tieing price and weight) then you are taking the first step to avoid the problem. I think we can all agree that the traditional market cap indexes have these issues (it's a well accepted academic view). Also, that a market cap index is a "growth biased" index (or a momentum index). Fundamental Indexes are designed to be have more of a neutral bias (more value than market cap, but more growth than value). BTW, Equal Weighted Indexes also solve some of this problem severing tie of weight and price, and it works. The problem is, and I think you would all agree, it's a very "crude" way of solving the problem (assumes the smallest company should have the same weight as the largest company), and it introduces signficantly higher turnover.
The results are great. Fundamental Indexing in US, Canada and around the world have outperformed the traditional index benchmarks. Now that does not mean they outperform every year (in fact they outperform generally 7 out of every 10 years). And the outperformance is in the 2%-3% range, on average across all the markets (EAFE markets, North America).
However, Fundamental Indexes will likely underperform in strong growth oriented markets, as would be expected. In fact, we are seeing that in Canada right now. We have been in a growth dominated market by 2 sectors: Energy and Materials. And the FTSE RAFI Canada Index is slightly underperforming S&P/TSX 60. Thats because RAFI is 15% underweight the Energy and Materials sectors (BTW, in case you haven't noticed, S&P/TSX 60 is 50% weighted to these 2 sectors). But over longer periods of time, going back to 1984, RAFI has significantly outperformed.
I appologize, I would love to attach all the supporting documents to this, I just don't know how. So if you want, please email me and I would be happy to forward them to you directly. Also, you can visit our website (http://www.claymoreinvestments.ca
), which has historical performance statistics on the site (for both Canada and US Fundamental Index).
In reading some of the comments, I wanted to respond specifically to a few questions:
1) Higher Turnover and Costs - There are several public comments about Fundamental Indexing having higher turnover and costs. This is not true. Market cap indexes generally have turnover of ~6%...Fundamental Indexing is ~10%, which is insignificant. In addition, because of ETF structure, all rebalancing is done "in-kind" meaning no capital gains are realized in the fund. Therefore all the gains are deferred till the investor sells their Shares.
2) Small Cap Bias - this is something that is absolutely incorrect. In US, the RAFI 1000 has avg. market cap of $90B vs. S&P 500 of $85B and Russell of $90B. Not much of a small cap bias. Likewise in Canada.
3) RAFI Application in Canada - I think there was just some question about the application of RAFI in Canada. Once again, I appologize for lack of documents, but please do email me and I will forward info. But a few interesting points:
- RAFI Canada has 58 stocks in the index, and is overweight Financials (+5%), Telecom (+1.5%), Cosumer Disc. (+3%) and Cons. Staples (+3%) and underweight Energy (-5%), Materials (-7%),
- The companies in the list are not indifferent than those on the S&P/TSX 60, but the weights are. RAFI Canada is overweight Power Corp & Financial, Thomson, Alcan, BCE, IMO, CU (to name a few) and underweight RIM, Suncor, Teck, Barrick (to name a few). It doesn't include Income Trusts, nor companies like Kinross, ATI, Agnico, Domtar, Goldcorp.
- The common underlying issues of market cap indexing exist in Canada as they do everywhere in the world. As a result, RAFI has outperformed traditional market cap indexing all developed markets globally.
- The indexes have been created and tested in each of these markets by FTSE, RA and Nomura Securities. Each with similar independent results.
4)"Just Another Value Index?" - lots of people say that RAFI is just another value index. But, RAFI actually outperforms value indexes. It is value tilted vs a market cap index (we would suggest its actually the market cap index that is growth tilted). But RAFI is not just another value index, in fact it doesnt look at valuations in any way to weight companies. It works by randomizing the errors
5) RAFI Indexes rebalance annually in March.
6) Higher fee of 65 bps vs. XIU of 17 bps - the fee is higher because the licensing fees are much greater. Also, the underlying RAFI Indexes have outperformed by 2-3% long term relative to mkt cap indexes. In addition, standard index ETFs like XIU should be low, in fact 17 bps is high relative to US standard ETFs like SPY and Vanguard (you're getting market return, less fees, never better). Finally (and a very important observation), the div yield on RAFI Canada is 50 bps greater than S&P/TSX 60. As a result, the MER difference made up with a net yield which is the same for investors. This is the same in US as well.
7) Liquidity of the ETF - as you know, an ETF has Designated Brokers that make markets and keep spreads tight. They maintain the price trading at or close to NAV at all points during the day. The spread they utilize depends mainly on the liquidity of the underlying stocks in the index. The more liquid, the tighter the spread. CRQ has a very tight Bid/Ask spread, so there is very good liquidity around these goal posts. Of course, being a new provider of ETFs, we are building awareness, and this takes times. But the strategy is sound and the ETF is liquid.
8) Tax Efficiency - as mentioned above, any rebalances are done "in-kind" so we would anticipate defering all gains in the fund until the investor sells their shares.
As a final note, we are very committed to bringing the best products to Canada. We think Claymore being an ETF player is important for the market and for Canadian investors. We are going to help bring innovation and alternatives to the standard market ETFs. We also are highly committed to the ETF business in Canada (unlike several predecesors). We have just launched 3 more ETFs today (US RAFI, BRIC and Dividend & Income) and are planning several more for the end of September (Global RAFI, Japan RAFI, and Oil Sands).
Please feel free to email me or call me if you have any questions. Always willing to discuss ETFs, our products and the market.
President, Claymore Investments