Investment ETFs
An investment ETF is one type of smart beta ETF that tracks an index that selects stocks based on how much the company is investing in its future growth, either by making capital expenditures for new buildings and equipment, or by acquiring other businesses. The irony is that academic factor research has generally found that the less that a company invests, the better the stock performs.
Fama French, for example, included investments as a factor in their famous "five-factor" model. Fama French measured investments by looking at the growth in a company's total assets from year to year. Similarly, Hou Xue and Zhang included investments as one of their four factors in their "q factor model". Hou Xue and Zhang also measured investments by looking at the growth in a company's total assets. In both cases, the research found that fewer investments, or more specifically, less growth in total assets, contributed to better stock market performance.
In addition to the academic research, there are some stock market indexes that support the argument that fewer investments lead to better stock performance. For example, the S&P 500 Capex Efficiency Total Return Index (SPXCAPUP) selects the 100 constituents of the S&P 500 which have exhibited the strongest capital discipline, in the form of efficient capital expenditures, over the near term. In order to qualify for inclusion, a company’s most recent year of capital expenditures scaled by sales must be lower than its historical three-year average. SPXCAPUP equal weights its holdings.
Why are fewer investments better for the stock? Most people would instinctively think that companies that are making higher investments in the future would perform better in the long run, not the other way around. There is not really a definitive answer, but there are lots of theories. Perhaps this is due to companies making acquisitions that don't really pan out, or don't generate a very high return on investment. Or perhaps this is a sign that capital intensive businesses don't generate a high return on investment. Or perhaps this is a sign that good management teams carefully monitor their balance sheet and maximize return on investment by conserving cash.
There are not very many ETFs in our database that are selecting stocks using the investment factor:
| Name | Symbol | Last price | Currency |
|---|---|---|---|
| Vanguard Mid-Cap Growth | ARCX:VOT | 259.98 | USD |
| WisdomTree US Dividend Growth ETF | XNAS:DGRW | 81.68 | USD |
| VictoryShares US Multi-Factor Minimum Volatility | XNAS:VSMV | 48.52 | USD |
| WisdomTree Intl Hdgd Div Gr ETF | ARCX:IHDG | 43.48 | USD |
| Vanguard Mega Cap 300 Growth Index | ARCX:MGK | 349.29 | USD |
| Vanguard Small-Cap Growth | ARCX:VBK | 284.22 | USD |
| Vanguard Growth ETF - DNQ | ARCX:VUG | 417.54 | USD |