Factor-Based ETFs Your Broker Forgot to Mention

However, is far from cap-weighted. This ETF takes stocks that are inexpensive on a valuation basis relative to the S&P 1500 index and overweights those names. Stocks that are expensive relative to that index are underweighted in VLU. Valuation is based on the ratio of its price to its level of earnings, cash flow, sales, book value, and dividends, according to to State Street.

There are a few knocks on VLU. The ETF is up just two percent this year, meaning a simple S&P 500 index ETF would have been a better bet. Additionally, VLU’s average daily volume is just 140 shares. Although the ETF’s underlying holdings are highly liquid, that volume number has the potential to scare investors away. If the volume does not do that, then the fact that VLU has not traded in almost three weeks just might do the trick.

First Trust Exchange Traded AlphaDEX Fund II (NYSEARCA:FCA) With the recent resurgence of China ETFs, debate has intensified regarding which ETF is best for playing the world’s second-largest economy. Investors that can see past FCA’s low assets under management number ($2.4 million) will see this ETF is worthy of a place in the conversation.

FCA holds true to the the AlphaDEX methodology, which has proven successful with other First Trust ETFs. That means the fund’s 50 holdings are selected based on factors including 3-, 6- and 12- month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets, according to First Trust.

FCA’s largest sector weight is financial services, but the allocation is 26.7 percent, so it is fair to say this ETF is not excessively weighted to Chinese banks as is the largest China ETF, the iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI). Overall, FCA offers exposure to 10 sectors, double the number of sectors tracked by FXI.

Valuation should not be ignored here because that has been one of the calling cards of China bulls over the past year. Indeed, FXI can still be viewed as inexpensive with a price-to-earnings ratio below 13 and price-to-book ratio of 1.61, according to iShares data. FCA is cheaper with a P/E ratio of less than 9.2 and a price-to-book ratio of just 1.17.

This article was originally written by The ETF Professor, and posted on Benzinga.