And SFV, like most of other MarketGrader-based funds, has been beating its most direct peers this year. Heading into Friday, it had returned -23.7% so far. That compared to a 24.8% loss by its traditional market-cap-weighted rival Vanguard Mid-Cap Growth ETF (AMEX: VOT).  

Lately, the quant-based process has been finding plenty of energy names. Some 30% of SFV's assets are invested in the sector. The ETF is rebalanced every quarter, most recently in the third week of August.

"A lot of the companies continue to report strong earnings, even though their stock prices aren't reflecting that right now," said Carlos Diez, president of MarketGrader.com Corp., SFV's index provider.

A prime example of that, he adds, is with energy sectors. Diez notes that despite the steep correction in oil during the past month, prices are still some $20 a barrel above where they were a year ago.

Earnings yield is a key metric monitored by MarketGrader's computers and factored into its index modeling work. That data is crunched for every company in the provider's benchmarks. "Since the market has been down so much this year, and since the companies we've selected for the index still have relatively high earnings, earnings yields are up," said Diez.

The MarketGrader 40—designed to identify a select list of companies with the best long-term business fundamentals on an ongoing basis—has an average earnings yield of 10.3%.

To put that into perspective, the Merrill Lynch High-Yield 100 Index is yielding 10.4%.

Dislocated Prices 

"In this environment where everyone's shunning risk, you have a bond index and a high-quality stock index yielding almost the same," said Diez. "That illustrates how dislocated market prices are from underlying market fundamentals."

Critics argue that price-earnings ratios for companies selected in the MarketGrader 40 are quite low—around 10.5 times 2009 estimates. That compares to the S&P 500's forward PE of 13.5.

"Some people might argue that the index's valuations are based on overly optimistic earnings estimates," Diez said. "But while that might be true for some companies, it's certainly not true for all."

He points out that earnings estimates for the S&P 500 have been revised down an average 4.7% in the past three months. In that same period, earnings estimates for an average company in the MarketGrader 40 have gone up by 7.5%.

"The danger in this market is very real. People are offering very irrationally. But our system doesn't market-time."

Owning well-managed companies with proven track records—and keep growing—is possible even in these times, Diez says. But keeping a long-term focus is essential, he adds, along with the discipline to avoid short-term market timing.  

"The fundamentals show that this is a buying opportunity. But market conditions are very volatile," said Diez. "You've really got to understand what type of index your fund uses and shop for the right index to meet your particular investing strategy and style."

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