Friday, February 7

An ETF that Mr. Burns would love

An ETF that Mr. Burns would love
| By Roger Nusbaum, TheStreet

Wary of social media startups and untested upstarts? A new fund holds only companies that have been around for 100 years or more – a strategy the miserly millionaire from 'The Simpsons' would surely deem 'excellent.'

Mr. Burns, the plutocrat from "The Simpsons," didn't get rich by investing in newfangled companies. He is more of a traditionalist.

On the show, his fictional portfolio included Transatlantic Zeppelin and Amalgamated Spats. These old-fashioned companies seem silly, but Mr. Burns may have had an innovative idea there: invest in longstanding companies.

Now there's an ETF for that.

The new PowerShares NYSE Century Portfolio (NYCC) owns companies that are household names and have been in business for at least 100 years.

That doesn't mean that the companies have been publicly traded for 100 years, though. For example, United Parcel Service (UPS) has been in business since 1907, but its stock has only been trading since 1999.

The implication, of course, is that the companies' ability to weather the last century likely means they will do well in the current one.

The PowerShares Century ETF is not a simple market cap-weighted index fund. PowerShares was an early mover in "smart beta" funds, which screen a broad-based index for stocks that meet a valuation metric or some other attribute like volatility or a dividend strategy. NYCC is one such smart beta fund.

The Century ETF also employs an equal weighting strategy. In other words, instead of holding its stocks based on their market cap (basically their size), it buys equal amounts of each of its stocks, regardless of valuation. PowerShares says it "helps the portfolio potentially avoid overweighting overvalued companies and underweighting underpriced companies." Equal weighting also allows smaller companies to contribute more to the fund's performance.

And more than half of NYCC is in small- and mid-cap stocks, which is surprising. Most investors would probably assume a fund like this would be dominated by mega-caps like Johnson & Johnson (JNJ) and Procter & Gamble (PG). While those names are in the fund, the equal weighting strategy allows room for companies that investors might not realize have been trading for so long.

Financials are the largest sector at 23 percent of the fund, followed by industrials at 20 percent. Consumer staples, consumer discretionary and utilities each have 11 percent weightings in the fund.

There is some flexibility on the inclusion criteria. Companies don't necessarily have to have existed in the same form for 100 years to be in the fund. For example, KKR (KKR) is a private equity firm founded in the 1970s. But, according to PowerShares, it merits a place in the Century ETF by virtue of its investment in Nabisco.

The New York Stock Exchange is the index provider for NYCC. In a back-test that goes back to 2000, the Century ETF's underlying index went up approximately 150 percent. Compare that to a 40 to 50 percent increase for various market cap-weighted indices, including the S&P 500 ($INX).

One of the big market stories from the last 15 years was, of course, the tech wreck. During the period of the back-test, the tech sector as measured by the Technology Select Sector SPDR (XLK) had basically no return.

The tech sector had a 30 percent weight in the S&P 500 back in 2000 and has always had a weighting in the mid-teens, so it was of course a drag on the performance of the S&P 500 during the back-tested period. Tech only comprises 3.25 percent of the Century ETF now. Although no information was provided as to tech's weight in the index for the back-test, the nature of the sector is such that very few technology companies are 100 years old.

This does not invalidate the thesis behind the fund. But it does serve to create a favorable back-test versus most broad-based indices. Today the S&P 500 has an 18 percent allocation to technology. The future of the Century ETF may not be as favorable as it was during the back-test -- unless tech puts in another decade of dismal relative performance.

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