EC Where’s The Alpha?

A deep dive into ETFs with the highest alpha coefficients shows small has been huge for equity portfolios; for fixed income, it’s zero duration. But what about the future?

The quest for alpha is often thought of as a search for the holy grail. It’s not. Presumably, there’s only one grail. Comparatively, alpha abounds.

The ETF market includes several funds, in both equity and fixed income, that have cranked out positive coefficients over the past three years. It’s a diverse mix, but worthy of examination to consider the prospects for alpha persistence going forward.

Equity ETFs

To keep things simple, we sorted the equity ETF universe through a Fama-French three-factor lens— the Market minus Risk-Free (Mkt-Rf) premium, the Small minus Large (SmL) return, and the High Book-to-Price minus Low Book-to-Price (HmL) bonus—to find alpha coefficients.

What came through are 185 equity funds that have yielded idiosyncratic returns beyond the model’s market, small-cap and value factors. From these, we’re highlighting the five non-leveraged portfolios with the highest alpha coefficients.

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The Invesco S&P Midcap Momentum ETF (XMMO) tracks an index of 80 high-momentum stocks harvested from the S&P Midcap 400.  Until June 2019, this fund was a different kind of animalThe bulk of the fund’s track record can actually be attributed to its former identity as a Russell growth index tracker. Since the fund’s focus has always been the mid-cap tier, its history is still instructive.

Straddling the financials and technology sectors, the Global X FinTech ETF (FINXtracks a market-cap-weighted index of companies involved in personal finance software, wealth management services, blockchain, and alternative currencies, mobile payments, crowdfunding, enterprise solutions, and marketplace lending.

Small stocks—really small stocks—are tracked by the First Trust Dow Jones Select MicroCap Index Fund (FDM). Focused on the bottom two market-cap deciles, FDM's underlying index screens for financial strength, evidenced by trailing earnings and book value ratios, together with measures of liquidity.

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Disclosure: None.

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