What Members Are Asking Online

Piotroski Screens

In the AAII Stock Screens area, the Passing Companies list for the Piotroski 9 approach has the note "Companies are ranked by FScore(d) and then by Price/Book(a)." I tried but could not find any definition of "FScore(d)." How can I find the definition of this term? Thanks.

—David Pressman via Web inquiry

CI Editor’s Response: Joseph Piotroski, an accounting professor, observed that most companies trade with low price-to-book ratios because they are financially distressed. He developed a nine-point scale to measure improving financial strength, hoping the best of these companies would be able to generate above-market returns.

The nine-point scale he created rewarded one point for each criterion in three categories: profitability, capital structure and operating efficiency. In his study that was published in 2000, he found that companies with a score of eight or nine outperformed those with a score of zero or one over the next year.

The F Score is simply how many points the company receives based on Piotroski’s nine criteria. The (d) means that the list is arranged in descending order by F Score. At AAII.com, you can see the screening criteria we use. A company with an F score of eight passes eight of the criteria, whereas a company with an F Score of nine passes all nine.

The overview article that accompanies the Piotroski approach at AAII.com explains his strategy and the scoring in more detail.

I note with interest that among the best stock screens you have are Piotroski 9 and Piotroski 8. Shouldn’t these be part of your [research database and screening program] Stock Investor Pro? It seems to me that all outstanding screens should be part of that package.

Could you kindly send me the code for these programs so I can program into SI Pro myself?

—Joe Tufariello via Web inquiry

CI Editor’s Response: This seems to be a question that is frequently asked. Piotroski 8 and 9 are among our best-performing screens. The Piotroski screen that comes preloaded in Stock Investor Pro is Piotroski 9.

On the AAII website, you’ll see a list of companies that show up for the Piotroski screen. This list actually includes the companies that pass both Piotroski 8 and 9. You can tell the difference by the F Score. Each company has an F Score of either 8 or 9, representing Piotroski 8 and 9, respectively.

In Stock Investor Pro, there is a simple way to change the preloaded Piotroski screen to reflect Piotroski 8. If you open the Piotroski screen in the screen editor, there is a line that allows you to change the F Score. Adjusting the F Score to 8 will give you only Piotroski 8 results.

Exchange-Traded Funds

Why build an ETF portfolio? Is it a viewpoint that is fundamentally different from the theory behind a mutual fund portfolio, or would most people have both ETFs and mutual funds in their asset allocation scheme?

—DanF via Discussion Forums

CI Editor’s Response: There are advantages and disadvantages to both exchange-traded funds (ETFs) and mutual funds. ETFs are generally not actively managed and track an index. The main advantage to investing in ETFs is the cost. For the most part, ETFs are less expensive and offer diversification that investors need. They are an inexpensive way to gain exposure to certain regions or sectors. On top of that, investors are diversified within that region or sector due to the number of holdings in each ETF.

Most mutual funds are actively managed, so there is the hope that a fund will outperform an index or benchmark. When investing in mutual funds, make sure that fees and load costs are reasonable.

As more and more ETFs are issued and choose more and more varied approaches, I find it more difficult to get good information about these funds. Does anyone know of a good source for such info—for example, analysis of a fund’s holdings or comparison of similar ETFs?

—Wak3er via Discussion Forums

CI Editor’s Response: The AAII Journal recently ran a “Best of the Net” guide that mentions two sites for ETF research: ETF Database (www.etfdb.com) and XTF.com (www.xtf.com). Both of these sites will provide comprehensive information on ETFs, including holdings and investment philosophy. Each site provides ETF screeners. ETF Database further offers a converter tool that shows you the best match when switching from mutual funds to ETFs. XTF.com provides an education center. These two sites are a great place to start.

Morningstar.com also offers ETF research. However, unlike ETF Database and XTF.com, Morningstar.com does not provide research solely on ETFs.

For more on these and other websites for ETF data, see this issue’s On the Internet column on page 10.