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Quant ETFs with Flair

The Team to Beat

Quant ETFs with Flair

February 26, 2008


SAN DIEGO ( - Over the past few years, funds that use alternative security selection and weighting methods have been one of the fastest growing categories in the exchange-traded fund (ETF) business.


Offering these sort of funds is SPA, which launched its lineup of U.S. listed ETFs during the fourth quarter of 2007.


Daniel Freedman, Director of SPA ETFs takes time to talk with us about their progress.


How many ETFs does SPA manage?


DF: We currently offer six ETFs. Each is listed on three exchanges: the American Stock Exchange, the London Stock Exchange and the Borsa Italiana.


SPA ETFs is an innovative, independent provider of second generation ETFs and they were established to offer private and institutional investors access to ETFs tracking fundamental U.S. focused indices.


As of February 20th, 2008 our worldwide assets under management was $58,68 million.


What market capitalization segments do the U.S. listed SPA ETFs cover?


DF: Currently, SPA ETFs offer a Small Cap ETF (Ticker: SSK), Mid Cap ETF (Ticker: SVD) and Large Cap ETF (Ticker: SZG), as well as three multi-cap ETFs.


The Small, Mid and Large Cap funds each contain 100 appropriately sized stocks, and are rebalanced semi-annually. The SPA Market Grader 40 contains 40 stocks and is rebalanced quarterly, and the SPA MarketGrader 100 and 200 contain baskets of 100 and 200 stocks, respectively, and are rebalanced semi-annually.


All of our ETFs track indices which choose stocks based on a company's fundamental attractiveness, combined with sensible diversification in terms of sector distribution and market capitalization.  


How does the ETF marketplace in Europe compare to the United States?


DF: Europe is about ten years behind the U.S. in terms of ETF growth, but is quickly catching up.


In the past, differences in jurisdictions and tax laws made listing in different countries difficult and as a result limited ETFs’ growth in Europe. Now, more standardized regulations make it easier to list on different exchanges –  if you list in one country you can cross-list in others. This makes it easier for ETFs to list in larger markets and makes the products much more accessible.  


Here's an example of Europe's progress: Assets increased by 50.3 percent in 2007, while in the US they increased by 35 percent. The London market alone had over 100 new listings of ETFs in the last 9 months of 2007, making for a total of 150 listings.


Each of the SPA ETFs use a similar index strategy. Can you explain more?


DF: Sure. SPA ETFs have an exclusive ETF relationship with MarketGrader, an innovative research company that’s developed a proprietary formula for evaluating companies and creating indices.  


MarketGrader's formula grades 5,700 listed US companies, including American Depository Receipts (ADRs), against 24 key fundamental factors, within four main categories: growth, value, profitability and cash flow. The highest rated companies are then measured against sector, market cap and rebalancing rules specific to each index.


Each SPA ETF tracks a specific MarketGrader index. And while all MarketGrader indices follow certain common rules, variations of these rules govern each index. This ensures each index tracks a different basket of companies and that all of our funds share an investment philosophy – but offer different benefits.


The indices are computer generated, which ensures there is no human interaction or bias. Additionally, they are fundamentally driven, equally weighted and regularly rebalanced.


What sort of portfolio turnover do the SPA ETFs have?  


DF: Our funds have ranged in turnover from 50 to 70 percent.


We view tax efficiency as a key benefit of structuring these investments as ETFs owing to the creation redemption process.


What's your take on the prospect of actively managed ETFs?


DF: Well, it certainly represents a good opportunity, as evidenced by the $13 trillion mutual fund industry.


SPA ETFs might like to participate in that type of market through optimized portfolios using the efficient frontier seeking to optimize portfolio returns and mitigate risk.


Is SPA Planning more ETFs in 2008?


DF: Yes. MarketGrader plans to expand its family of indices to include major market sectors and as part of the broader plan to offer MarketGrader Indices across a full range of investment categories, SPA ETFs has filed papers with the Securities and Exchange Commission (SEC) seeking to launch additional exchange-traded funds (ETFs).


These funds are expected to launch in the near future. Be on the lookout for more news and information about how they can work within a portfolio.


Thanks Dan.