How to Make Your Own Exchange-Traded Fund
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How Folios are created.
foliofn.com
Many investors who buy mutual funds or individual stocks review the past performance of those holdings or rely on the management of those funds. While studies indicate past performance is no indication of future success - and even the experts can't always pick the right stocks - we wanted to address investor questions about the criteria used to create FOLIOs.
The FOLIO[fn] system creates a FOLIO with certain characteristics including the number of stocks, beta, sector weightings, market capitalization weightings, etc. These current characteristics of a FOLIO are an indicator of expected future returns. The track record of a FOLIO, in contrast, demonstrates only that the past characteristics of the FOLIO correlate with the past returns.
Investors who buy shares in a mutual fund often examine the fund's past performance as a way of evaluating the manager who is picking that fund's stock holdings. The FOLIO[fn] system, however, does not pick individual stocks. We believe (and studies show) that it is very difficult to consistently pick stocks that will outperform the market. We can, however, pick stocks that create a FOLIO with certain characteristics, such as the 50 largest companies based on market capitalization or a FOLIO of Internet companies with a certain level of risk.
Since FOLIOs are composed of individual stocks, you can, if you
want, review the past performance of any FOLIO. But past
performance is not what matters.
Future expected returns are what matters to investors. And FOLIO
investing is based on the characteristics of a portfolio that allow you
to understand their expected future returns. We aren't saying that a
FOLIO will outperform the market. Rather, we're giving you the
FOLIO characteristics that are indicative of that FOLIO's expected
future performance.
FOLIOs are built according to characteristics that are fact based and
easy to screen for, such as risk level (also known as beta), industry,
size, sector, etc. Initially, we will be creating FOLIOs from a universe
of 2,500 stocks which represent 80 percent of today's trading
volume.
If, for example, you want a FOLIO of the 50 largest companies
based on market capitalization, we can provide you a FOLIO with
these stocks. Some FOLIOs reflect the characteristics of existing
indices or markets, such as the "FOLIO 30", which is comprised of
the 30 stocks included in the Dow Jones Industrial Average.
Other FOLIOs are based on non-financial characteristics, such as the
Women Leader FOLIO that is comprised of companies with a
significant percentage of women on the board of directors. Investors
who choose these FOLIOs can, as with all choices, review the
characteristics such as risk that will be indicative of expected future
returns.
In addition, some FOLIOs will be based on broad catergories such
as industry sector and its components will be designed to match the
overall characteristics of that catergory. The Technology FOLIO, for
example, will include stocks that have similar book-to-market ratios,
risk levels and other characteristics of the technology sector.
These FOLIOs may be appropiate for an investor who wants a
particular investment style, which is one of the most important
determinants of investment performance. For example, we do not
provide investment advice with respect to the FOLIOs that we have
created, but if you want to invest in the technology sector, we provided a simple and intelligent way to do that with our Technology FOLIO. |
