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A New ETF In Town: The PowerShares S&P 500 Value Portfolio

Summary The value portfolio offers an academically proven investment model for investors. P/E, P/B and P/S are well known and commonly used financial metrics. Even though this ETF seems a bit boring, based on an abundance of academically proven factors I would prefer this ETF over an index ETF following the S&P 500. Invesco recently launched new ETFs, one of them I covered in an earlier article: ” A New ETF In Town: The PowerShares S&P 500 Momentum Portfolio (NYSEARCA: SPMO )”. This is part 2, discussing the PowerShares S&P 500 Value Portfolio (NYSEARCA: SPVU ), which is an interesting addition to the S&P 500 momentum portfolio. Both momentum and value are 2 investment strategies which have received wide coverage in the academic world and the world of finance practitioners. The SPVU tracks the S&P 500 enhanced value index which is focusing on 100 S&P 500 companies with the greatest value score calculated based on fundamental ratios: book value/price ratio, earnings/price ratio and sales/price ratio. SPVU: The Value Portfolio Source: ETFdb The issuer of this new ETF is Invesco, a large independent investment management company incorporated in Bermuda which has many other ETFs to offer. The expense ratio of 0.25% is a very reasonable number . With 2.5 million assets under management it’s not a large ETF. Value Portfolio: Selection Strategy This ETF is a so called smart-beta ETF and will spend at least 90% of its total assets in the S&P 500 Enhanced Value Index. The selection process for 100 stocks is based on the book value/price ratio, earnings/price ratio and sales/price ratio: The book value to price ratio is calculated by using the company’s latest book value per share divided by its price. The earnings to price ratio is calculated by using the company’s 12-month earnings per share divided by its price. The sales/price ratio is calculated by using the company’s 12-month trailing 12-month sales per share divided by its price. A value score is then calculated. The best 100 stocks are selected for the underlying index. Value: A much covered topic in the world of academia The book value to price ratio is an asset factor which has been widely covered in academics. For example, a P/B of 2 means that the stock is priced twice as much as it could sell for. It is also used to explain the portfolio return of portfolio managers, in for example academic models such as the Fama and French asset model . Generally, a firm with a lower book value to price ratio outperforms a firm with a higher book value to price ratio. A reason for this could be that a firm with a lower ratio indicates a distressed stock which makes it look cheap. Yet, if you believe in the efficient market hypothesis , a cheap stock could only be a cheap stock because investors consider it risky. The price to earnings ratio (the inverse of the earnings to price ratio) is one of the most widely used fundamental ratios in the financial markets. For example a P/E of 20 can indicate that you pay $20 for $1 of earnings. If then compared to numerous other investments, commonly it seems like a better deal if you pay the least for $1 of earnings. It has been proven, time and time again, that investment in a lower P/E related firm outperforms investments which yield a higher P/E ratio . Nevertheless, the world of academia has further expanded on price/earnings ratios recently, for example, in the discrepancy between negative P/E firms and positive P/E firms. Athanassakos (2014) concluded in his research that certain negative P/E firms indicate high forward stock returns, even though past price/earnings ratio research most of the time excluded negative P/E firms. I believe future research in the world of financial academia will continue in this path. The price to sales ratio is the third metric which is used in this ETF to value stocks. A lower P/S is preferable over a higher P/S ratio. Furthermore, it’s one of the best metrics used for companies which are a in a so called ‘turnaround’ modus, where the firm has lost earnings (negative P/E and no dividend for example), the P/S ratio offers the opportunity to compare firms. Additionally, the P/S also has been covered numerous of times in the world of academia where the outcome and conclusion is often very similar to each other. The price to sales ratio offers a good (to sometimes even better) explanatory power in explaining stock returns in comparison to for example the book-market value of a stock. All in all, this ETF follows 3 well known financial metrics which have been proven in the world of academics, decade after decade. Conclusion In addition to the momentum strategy ETF I consider it highly likely that this ETF will outperform the stock market as a whole over an extended period of time. This assumption is based on the abundance of research on the book/price, price/earnings and sales/price ratio in the world of academics. Yet, as the world of academia is moving forward, I would not be surprised to see updated Value ETFs where new metrics/findings will be implemented. I assume based on the current findings in academia that they will offer better risk/reward premiums to investors in comparison to this ETF. The world of negative P/E firms has yet to be uncovered to the same extent as positive P/E firms. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This information is not a recommendation or solicitation to buy or sell securities, nor am I a registered investment advisor.

3 Of Seeking Alpha’s Best, Part III

Summary As a hedge fund manager, who do I think is worth following on SA? 3 (more) writers I take seriously and think you should too. This is the third in a continuing series. In Part I and Part II , I looked at six of Seeking Alpha ‘s best contributors. In this sequel, I offer three more worth following. I follow them closely and recommend that you do too; you will learn and profit from their expertise. Mike Winston Mike is a great idea-generator and friend. I interviewed him for my blog and listen carefully to his ideas. He is an expert on Yahoo! (NASDAQ: YHOO ). If you are interested in the Yahoo! stub, check out Yahoo’s Cashless Spin-Off Has Strong Business Purposes: Employee Options And Merger Currency and The Yahoo Tax Myth . Heath Winter Heath Winter is a former colleague and longtime friend. He is particularly expert in options strategies around merger arbitrage. You should read all of his ideas, but one that appears to remain a particularly attractive opportunity today is OmniVision Technologies A Top Opportunity In The Merger Arbitrage Universe . OmniVision (NASDAQ: OVTI ) has a $1.04 net arbitrage spread, which offers a 12% annual return if the deal closes by next February. Jeremy Raper Jeremy Raper is responsible for some terrific investment ideas on both the long and short side. One portfolio overlap of ours has been Avolon (NYSE: AVOL ), which he discussed in Avolon: Growing, Underfollowed Business At Steep Discount To Comps, 40%+ Upside , Avolon Update: Impressive Q1 Execution, Valuation Gap Vs. Peers Will Continue To Narrow , and in his Quick Update On Avolon . The $0.52 net arbitrage spread offers a 4% annual return, if the deal closes by next March. Another idea worth studying is Monster Worldwide (NYSE: MWW ), which he presented in Monster Worldwide: Frightening History, But The Only Thing Scary Now Is The Upside . This stock has generated significant interest on Sifting the World . You are also welcome to follow me and my investment ideas here . I do not claim to be one of Seeking Alpha ‘s best, but I stumble upon a misplaced bet from time to time. Here is a bit more about me in case you are interested. About the Author I began my career conducting public policy research and investigative work on behalf of hedge funds and proprietary trading desks impacted by government and political risks. My research for clients such as leading hedge funds and banks included regulatory and antitrust analysis, as well as litigation and legislation tracking. This work provided actionable intelligence and risk assessment. I founded Rangeley Capital in 2007 in order to exploit the seams between other hedge funds’ mandates. Such situations include broken deals, volatile corporate transactions, and securities that are hard to hedge. Rangeley enters positions with DC risks where spreads have blown out more than is justified by analyzable exposures. The goal is to buy at discounts to the value of probability-weighted outcomes. The intention is to always underpay. Today, Rangeley owns a portfolio of event driven value investments. Positions are taken in order to maximize the expected value of our portfolios. They are sized to account for liquidity and downside. Rangeley’s Special Opportunities strategy launches in January 2016 under the leadership of Andrew Walker . Andrew focuses on small capitalization, under analyzed opportunities that lack a natural investor base capable of correcting mispricing. You can read about Rangeley’s past and our future . If you are an accredited investor who wants to learn more, please contact my colleague Rob Sterner at resterner@rangeleycapital.com for details about Rangeley Capital and our upcoming fund launch. If you would like to consider becoming a member of Sifting the World , just send me your e-mail address and I would be happy to offer you additional information about joining.

3 Of Seeking Alpha’s Best, Part II

Summary As a hedge fund manager, who do I think is worth following on SA? 3 (more) writers I take seriously and think you should too. This is the second in a continuing series. In Part I , I looked at three of Seeking Alpha’s best contributors. In this sequel, I offer three more worth following. They all happen to be hedge fund managers and friends of mine. Whitney Tilson Whitney Tilson founded and manages Kase Capital and he wrote The Art of Value Investing and More Mortgage Meltdown . He has been a valuable contributor to Seeking Alpha, especially on the short side. I want to highlight some of his short ideas that I found most compelling at the time. He has been one of the most consistent voices on the issue of World Acceptance (NASDAQ: WRLD ) since publishing his compelling investment thesis, World Acceptance: A Battleground Stock I’m Short . One of the next up was K12 (NYSE: LRN ). Shorting can be a painful waiting game, but he did not have to wait long on An Analysis Of K12 And Why It Is My Largest Short Position . For more on LRN, he also published this slide presentation. Whitney is probably best known on Seeking Alpha for the quality (and quantity) of his devastating work on Lumber Liquidators (NYSE: LL ), starting with My Analysis Of Lumber Liquidators’ Updated Guidance . Here was my reaction to the 60 Minutes episode on LL: Whitney, Well done and congratulations! It was a terrific and compelling piece. The LL founder was evasive and deceptive. I replayed his comments several times. He knew . This is an important and favorable development for short sellers. Shorting and exposing truth is not a conflict of interest – it is a confluence of interest. Ethics involves not lying/cheating/stealing; we cannot rely on the cheap substitute of listening only to people with nothing at stake. Modern investment management has often tried to rely on both thinking substitutes and ethics substitutes. Thinking substitutes such as diversification and volatility minimizing have fared poorly but have not yet been abandoned. Ethics substitutes (“listen to me because I promise that I have at no time and in no place ever even thought about doing with my own money what I now tell you to do with yours”) have fared just as badly but are still in daily use. Your 60 Minutes segment is a big step towards real morality in business and investing. Sure, you are invested in the outcome, but you are invested because your view – and the evidence you lay out – supports that outcome. That is a bigger deal than whatever ultimately happens to LL. Finally, it serves the interest of free enterprise and free trade to have markets self-policed. Pieces such as this can protect markets from inevitable calls to have endless central planning and control. The best way to counteract the self-interest of cheaters is with the interest of short-sellers. While the government may have the resources, it never seems to have the speed to act when it counts. You have both and did something about it. Chris DeMuth Jr. InterOil (NYSE: IOC ) is one that we have both followed for a long time. I wrote about our IOC short on my blog and in InterOil Increases Production… Whitney’s thinking was helpful to the short thesis, including his article Why There’s More Downside To Come For InterOil . When he wrote The Beginning Of The End Of The 3D Printing Bubble… …it was, in fact, the beginning of the end of the 3D printing bubble. Unilife (NASDAQ: UNIS ) has been a favorite topic of mine on my blog here and here , as well as in an article on my favorite pairs trade. While I do my own work, Whitney’s contribution to the topic further solidified my thinking on this company. Ben Axler Ben Axler founded Spruce Point Capital, a long/short hedge fund. He has exposed over $1.0 billion of alleged listed frauds on NASDAQ and the NYSE. Want a great short idea? Read about Caesarstone Sdot-Yam (NASDAQ: CSTE ) in Ben’s article: Caesarstone: A Counter To The Bull Thesis On Quartz Countertops Suggests 40-75% Downside . It has declined by over 20% since publication, but remains expensive and risky. Value investors, skeptics, and debunkers should follow him here on Seeking Alpha and here on Twitter. You can also learn more about his hedge fund and other investment ideas on Spruce Point’s site . He was kind enough to join us for our last biannual ideas dinner in New York City last month where he gave us a devastating preview of what would happen to CSTE. His update is available here: Downgrading Caesarstone On Concerns About Its Capital Expenditure Accounting And Management’s History At Tefron . Andrew Walker A portfolio manager at Rangeley Capital, Andrew is a long-time friend. We have collaborated on investment ideas that we’ve posted on Seeking Alpha as far back as our early work on ALJ Regional Holdings ( OTCPK:ALJJ ), which I wrote about here . If you have an hour to learn about investing in small caps, you should listen to this interview. Additionally, I describe our work together here . Next year, we will launch our new Special Opportunities strategy that will focus on small-cap equity opportunities including special situations. Andrew has been chosen as the portfolio manager to run that new endeavor. He is exactly who I always wanted to run such a strategy. I will follow the example of Charlie Munger, who says that: Berkshire (NYSE: BRK.A ) (NYSE: BRK.B ) is run with decentralization almost to the point of abdication. While I plan to do the same at Rangeley, this requires the perfect people to manage specific businesses. Happily, I have the right people. Meanwhile, if you would like to hear more of Andrew’s investment ideas, he and I will both be speaking at an upcoming conference focusing on microcap investing. Conclusion These are the types of people I rely upon. Charlie Munger said that: The highest form that civilization can reach is a seamless web of deserved trust – not much procedure, just totally reliable people correctly trusting one another. This is what my web of deserved trust looks like. Who is in yours? Who should I add to mine? I intend to keep this series going, so please let me know if there is anyone who writes on Seeking Alpha who should be included in a future edition. I am always in search for idea candidates for Rangeley Capital as well as candidates for both new submissions and new members for Sifting the World . Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.