Elkhorn Capital Group, the exchange-traded fund issuer founded by former PowerShares’ veteran Ben Fulton, launched its second fund recently with an eye on high-dividend paying US companies.
The newly launched Elkhorn FTSE RAFI US Equity Income ETF (ELKU) employs an investment strategy created by Research Affiliates, one of the pioneers of the so-called smart-beta investing.
ELKU tracks the FTSE RAFI US Equity Income Index, a gauge derived from the FTSE US All Cap Index and jointly developed by Research Affiliates and FTSE Russell. The index aims to offer risk-managed exposure to high dividend paying US companies after screening fundamentals.
Financial health and strength of fundamentals are determined through the analysis of metrics such as sales, cash flow, profitability, debt coverage ratio.
Research Affiliates’ patented fundamental weighting methodology – which uses such metrics as price-to-book ratio and trailing 12 months dividend yields, is subsequently employed to identify potential index constituents. Only stocks with yields above the median and that display attractive valuations are included in the portfolio.
By weighting portfolio holdings by characteristics other than market capitalization, ELKU seeks to avoid overvalued stocks and to produce superior risk-adjusted returns. Smart-beta investment strategies exclude weighting by market capitalization; the new fund’s fundamentals based weighting methodology seeks to eliminate high-dividend paying, but financially unsound companies and aims to mitigate sector concentration risk in order to reduce volatility and improve returns.
While equity linked high dividend yield stocks readily attract investors, many forget to consider the company’s ability to sustain and grow those payouts. ELKU’s low exposure to interest rate sensitive sectors such as telecom and utilities makes it less vulnerable in a rising rate environment. With 159 securities in the portfolio, the new fund is fairly well diversified.
ELKU charges 0.39 percent annually, which is reasonable given its complex portfolio selection methodology.
Disclosure: No holdingsContact Ulli