Claymore Takes Quant Investing Global With Two New ETFs

International markets always struck me as the perfect venue for quantitative index strategies. After all, supporters of quantitative strategies are basically making two claims:

1) Markets are too risky, and by introducing a sell discipline, you can mitigate that risk; and/or

2) There are inefficiencies in the market that can be exploited by smart trading.

I’m not sure I believe either one. But if you do believe either 1 or 2 (or both), international markets are where you want to be. If domestic markets have some risk, international markets have more. And if you think inefficiencies exist that can be exploited, the first place to look is in less liquid, less-developed markets where the accuracy of information is less certain.

All of which makes the two new exchange-traded funds from Claymore Securities interesting test cases. The Claymore/Robeco Developed International Equity ETF (EEN) and Claymore/Robeco Developed World Equity ETF (EEW) take quant strategies global, applying a quantitative risk model to global portfolios in hopes of creating better risk-adjusted returns.

The quant strategy relies on a mixture of book-to-price ratio, momentum, earnings revisions and share buybacks to select individual stocks. The resulting mix of securities shares similar statistical measurements (P/E, average market cap, etc.) with comparable cap-weighted benchmarks, such as the MSCI EAFE Index. The only blunt area of difference is the price-to-book ratio, where the Robeco funds are markedly lower than their benchmarks in each case. Country weightings are nearly identical for the Robeco funds and the benchmarks, as the Robeco funds weight countries by market cap.

The funds launched on the American Stock Exchange on March 1, and charge 74 basis points. Unfortunately (in some sense), the launch just missed the dust-up from the recent market gyrations; that 5 percent down-day would have been a great test case of whether a quant overlay could help you sidestep a major market pullback.

It remains to be seen how the new funds will perform. Claymore is rightfully not pushing any backtested data, as the black-box nature of the strategy renders backtested data useless. The funds will have to prove themselves in the world of real returns.

Of course, the real killer-app here would be an emerging markets ETF; emerging markets would take the risk- and efficiency arguments to the extreme. While data availability might be an issue (you need analyst coverage to have earnings revisions, for instance), I’m guessing that Robeco is working on the problem right now.