An August posting on the blog of New Constructs looked at the First Trust Value Line 100 ETF (FVL), saying that “FVL’s methodology tracks an index, but it is an index in name only.”
What is an index? An important debate among investors, perhaps the most important, is whether active management is the way to go or whether passive investing makes sense in most or all cases. (For some perspective on that, see my recent essay on the paradox of choice.) Since passive investing is also referred to as “indexing,” and ETFs are a popular way to track an “index,” New Constructs believes that it is too easy to think that using ETFs is akin to adopting a passive strategy. That is, our words get mangled; we have a terminology problem.
New Constructs evaluates ETFs by looking at the holdings within them, and pronounces FVL, which is based upon the Value Line 100 Index, as being in the “danger zone” in terms of its exposures. The firm also points out that the ETF’s fees are decidedly un-passive.
This brings up a lot of interesting questions for investors and their advisors. What is the combination of true passive exposure, fundamental overlays, and quantitative structuring that is found in a particular ETF? Good question — and one which is posed and answered a lot less than you might think.
As for the chart, it shows the performance of FVL and three Guggenheim ETFs, all equal weighted, as is FVL. The two virtually on top of each other track the S&P 500 (RSP) and the Russell 1000 (EWRI); the other one is for the Russell 2000 (EWRS). The chart starts at the inception of the two Russell-based ETFs.
Whether FVL is dangerous or not, the topics raised by New Constructs are worthy of debate. Where are the lines of passivity and activity? (Chart: Bloomberg Terminal.)