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Greg Fierros

Greg Fierros worked with Envestnet on portfolio analysis, due diligence, ETFs, value, international and alternative investments.

As a fund due diligence and investment analyst, one of the things, I am looking for is lower cost alternatives to higher priced active funds. However, finding that perfect alternative is not possible to do manually give the size of the universe: 40,000+ stocks, mutual funds and ETFs.  Raltin takes out all the manual work by running 2.5+ billion correlations on closing prices for all combinations of mutual funds and ETFs to find the best alternatives. Using Raltin’s technology to find ETF alternatives for the most popular active mutual funds proved surprisingly easy. Just enter the ticker into the search box and the results pop out.

Here is the table for some of the largest active mutual funds and their ETF alternatives:

Mutual FundAlternative ETF 1 (Correlation Score)Alternative ETF 2 (Correlation Score)Alternative ETF 3 (Correlation Score)
Northern Large Cap Core Fund (NOLCX)SPDR S&P 500 (NYSEArca: SPY) (0.99)iShares Russell 100 (NYSEArca: IWB) (0.99)iShares Core S&P 500 (NYSEArca: IVV) (0.99)
Nuveen Large Cap Core Fund Class I (NLCIX)iShares Russell 3000 (NYSEArca: IWV) (0.93)Vanguard Total Stock Market (NYSEArca: VTI) (0.93)First Trust Large Cap Core AlphaDEX (Nasdaq: FEX) (0.93)
Fidelity Large Cap Core Enhanced Index Fund (FLCSX)Invesco FTSE RAFI US 1000 (NYSEArca: PRF) (0.94)iShares Russell 1000 Value (NYSEArca: IWD) (0.93)iShares Russell 3000 (NYSEArca: IWV) (0.93)

The first fund, the Northern Large Cap Core fund, reveals three alternatives which performed almost in line with the mutual fund, each returning a correlation score of 0.99.  Its closest alternatives given are the SPDR S&P 500 ETF (NYSEArca: SPY), with an almost perfect correlation of 0.99, and an expense ratio of .09% vs 0.46% for the mutual fund.   iShares’ Russell 1000 ETF and iShares Core S&P 500 ETFs returned similar correlation scores, but with expense ratios of 0.15% and 0.04%, respectively.

Next up, Raltin’s analytics reveals that the Nuveen Large Cap Core Fund which seeks to outperform the Russell 1000 (large cap core), actually exhibits characteristics more like the Russell 3000 (all cap core).  Sometimes, investment managers seeking to outperform a large cap index like the Russell 1000, may have a slight underexposure to the market cap factor as a way to squeeze some extra relative returns out of their funds, without exhibiting increased skill in stock selection.  iShares Russell 3000, could have gotten a correlated return stream (0.93), while charging half a percent less in expenses per year.

Finally, the Fidelity Large Cap Core which draws its opportunity set from the S&P 500, interestingly is best encapsulated by an ETF which doesn’t track the S&P 500 at all, but rather, tracks the Invesco RAFI US 1000 index.  The mutual fund uses a mainly quantitative investment process to select those names which exhibit characteristics most likely to outperform over the long term. This may explain why the fund is most correlated to an ETF tracking the FTSE RAFI US 1000, returning a correlation score of 0.94. The index uses an alternative weighting methodology that incorporates cash flow, book value, sales and dividends.

Not only can Raltin’s correlation technology provide you with low cost ETF alternatives to your clients’ portfolios, but it also give clues as to what is actually going on under the hood of their mutual funds.