Is Fantasy Football is Driving the Popularity of “Smart Beta” ETFs?
#fantasyfootball @CBOE #smartbeta @Powershares

Is Fantasy Football is Driving the Popularity of “Smart Beta” ETFs?

Labor Day weekend is the time when football enthusiasts from all over the USA, get together to “draft” their fantasy football teams. I must confess that I have never read a sports page nor played Fantasy Football. My primary motivation for attending a sporting event, is whether the tickets were free and how good the dessert cart looks.

As a former OEX trader at the Chicago Board Options Exchange (CBOE), I was first introduced to Fantasy Football in the mid- 1980’s, when traders ran off the floor at the closing bell to draft their “picks”. Because of my total disinterest in organized sports, I was considered “beyond reproach” and was given the honor of picking the drafting order from a hat to “kickoff” the season. Everyone knew I was there for the submarine sandwiches.

Today, CBOE option traders vividly remember their first involvement in Fantasy Football. My longtime friend Mark, who still is a “market-maker” on the trading floor, fondly remembers it “happening in 1982, Marcus Allen’s rookie year.”

Wikipedia defines Fantasy Football as:

“Fantasy football is an interactive online competition in which users compete against each other as general managers of virtual “fantasy” teams built from “drafting” real players. The players that an individual is able to manage are professional American football players in the National Football League. The different actions people are able to make are drafting, trading, adding or dropping players, and changing rosters every week.”

In other words, the generation that brought you the iTunes ®playlist are now using the internet to design interactive, personalized fantasy teams based on statistics from real NFL players. The players are the same; it’s just that today’s generation demands the freedom to create their own “playlist” and not be constrained by fixed design.

Traditional NFL teams are like a vinyl record album. A record album contains a fixed number of songs in a particular order; and as a consumer, you’re forced to pay for the “bad” songs along with the good. I remember back in the 1970’s, spending a lot of money on an album just to get one good song!

Similarly, the S&P 500 and Dow Jones Industrial Average are like traditional NFL teams, whereas an iTunes® playlist is more like a Fantasy team.

The primary criteria for inclusion in the S&P 500 index, is the size of the company. It’s a capitalization-weighted index where 10% of the players in the index represent about half the annual return. The DJIA is a “price weighted” index, meaning the higher the dollar value per share or a company, the greater influence it has on the movement of index.

These indexes are designed to represent every broad sector of our economy. The downside of broad representation is the continual “tug of war”, when not every sector of the economy is simultaneously running on all cylinders.

When Technology produces a touchdown in performance, Steel and Precious metal stocks lose it. When interest rates increase, Utilities stocks generally decline. Traditional indexing hold the strong and weak stocks.

I believe a new generation of investors are changing that with the concept of “Smart Beta” exchange traded funds (ETFs).

“Smart Beta” funds have selection criteria other than size into consideration when they build their playlist of stocks. “Smart Beta” represents an alternative selection index based methodology that may outperform a benchmark or reduce portfolio, or both,” (1)

My personal preference in “Smart Beta” Exchanger Traded Funds (ETFs) are the DWA Momentum Exchange Traded Funds (ETFs) sponsored by Invesco Powershares. (2)

Disclaimer: Cenacle Capital does have a small, select amount of SMA accounts allocated to these funds.

Having been a longtime subscriber of the Dorsey Wright & Associates database service, I find the concept of momentum funds intriguing.

Not everyone is a fan of “Smart Beta” funds including John Bogle who considers them a “marketing gimmick”. Rob Arnott from Research Affiliates believes “Smart beta outperforms because it breaks the link between price and weighting in the portfolio”. (3)

Invesco’s Powershares DWA Momentum funds hold an equal-weighted portfolio of stocks with a positive, upward momentum bias using “relative strength” as their offensive coach.

Traditional indexes delete stocks after a player is seriously injured, and their market size fall below the minimum listing requirements, while ”smart” funds bench the weak players sooner from ETF membership, at least theoretically in the early stages of momentum weakness.

In my opinion, “Smart Beta” funds represent a new take on a classic theme. Their design is meant to modernize investing for a new generation of investors wanting something other than a fixed platform designed by grey haired baby boomers.

After all, iTunes® didn’t invent classic rock; they just deliver it in a personalized way.


(1), (2)

(3): Investment Advisor: April 2014. “The Rise of Smart Beta”.

Copyright 2014; Bill Ulivieri-Owner, Cenacle Capital Management, LLC.