I Can Haz Make You Money?

 How I built an ETF based on cats and made a paper fortune

 “The No. 1 thing is that it lacks an economic foundation”

- Dani Burger

I was rich. Right?

I mean, that’s what the numbers on my computer showed. I’d just created a customized index of stocks and run a test to see how it would have performed if someone had invested in it six years ago. The result: an 849,751 percent return. All it took was investing in companies with the word “cat” in the name. People love cats.

It sounds crazy, but I was following the playbook behind one of Wall Street’s hottest trends: smart beta exchange-traded funds. These ETFs, which had $470 billion in assets in 2016, are index funds with a twist. Instead of investing in portfolios that mirror standard indexes such as the S&P 500, they track customized indexes that emphasize some factor that might lead to out performance—stocks with cheap valuation, say, or low volatility. There are also ETFs that pick stocks based on themes, such as “Biblically responsible” companies or on one of those products big with millennials. There are hundreds of these funds, and their exploding popularity has made a gold rush for creators. I wanted in.

So why not cats? My theoretical smart beta ETF seemed to do all the things that real ones do. It had a strict selection criterion (anything with the letters “c-a-t” somewhere in the name) and a rule for how much to invest in each stock (equal weighting). And on paper, at least, it got results. “I love cats, too, and obviously cats are superior, so this is a great investment strategy,” Andrew Ang, cat owner and head of factor investing strategies at ETF giant BlackRock Inc., told me when I showed him the results. “I’m joking, of course.”