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'Factor-Based' ETFs Your Broker Forgot to Mention

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An index fund, in most cases, is everything its name implies.

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Editor's Note: This content was originally published on Benzinga.com by The ETF Professor, Benzinga Staff Writer.

A long-standing staple of the ETF business has been, and probably always will be to some extent, the passively managed index fund. An index fund, in most cases, is everything its name implies: A fund constructed using the securities of a specific index, be it the S&P 500 (INDEXSP:.INX), the MSCI Emerging Markets Index, or another index.

Since most indexes are weighted by market capitalization, that means most index funds use cap-weighting methodology. Translation: The index's largest holdings are usually those with the largest market value.

In terms of gathering assets, this approach has worked well for ETF sponsors, but as the industry has grown, savvy investors have sought out opportunities beyond traditional cap-weighting. Equal-weight ETFs have served as a popular avenue for investors looking to escape the cap-weighting rut.

Additionally, factor-based ETFs have increased in popularity. A simple definition of factor-based ETFs is that these funds are not quite actively managed per se, but they go far beyond the passive, cap-weighting routine by using growth, valuation, and technical factors.

Obviously, investors will want to know if factor-based ETFs generate noteworthy returns relative to their cap-weighted rivals. In some cases, the answer is a resounding yes, so do not forget about these factor-based funds.

PowerShares DWA Developed Markets Technical Leaders Portfolio (NYSEARCA:PIZ): PIZ is the developed markets equivalent of the popular PowerShares DWA Emerging Markets Technical Leaders Portfolio (NYSEARCA:PIE).

PIZ excludes US-based companies and its holdings (usually 100, but currently 104) can be domiciled in, but not limited to but not limited to Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

And like PIE, PIZ holds stocks that are displaying impressive relative strength traits. That does have a positive impact on returns. Year-to-date and over the past 12 and 36 months, PIZ's underlying index, the Dorsey Wright Developed Markets Technical Leaders Index, has outpaced the MSCI EAFE Index (NYSEARCA:EFA) and the MSCI EAFE Growth Index (NYSEARCA:EFG).

SPDR S&P 1500 Value Tilt ETF (NYSEARCA:VLU): A quick glance at the top holdings of the SPDR S&P 1500 Value Tilt ETF might indicate that this is a cap-weighted ETF. A top-10 lineup that includes Exxon Mobil (NYSE:XOM), AT&T (NYSE:T), and Chevron (NYSE:CVX) has a way of doing that.

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No positions in stocks mentioned.

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