BlackRock has launched a new smart beta ETF on NYSE Arca, providing exposure to US mid-cap stocks that have been selected via a multifactor process.
The fund seeks to maximise exposure to four factors – value, momentum, quality, and low size – while maintaining a risk profile similar to that of the MSCI USA Mid Cap Index.
The iShares Edge MSCI Multifactor USA Mid-Cap ETF (MIDF US) is linked to the MSCI USA Mid Cap Diversified Multiple-Factor Index and comes with an expense ratio of 0.25%.
Methodology
The fund’s index selects its constituents from the universe of MSCI USA Mid Cap stocks.
This parent universe represents the performance of the US mid-cap equity market and currently consists of 340 stocks, covering approximately 15% of the country’s listed market cap.
The index seeks to maximize exposure to four factors – value, momentum, quality, and low size – while maintaining a risk profile similar to that of the parent universe.
It does this by optimizing the parent universe using a Barra Equity Model that seeks to maximize exposure to the selected factors while adhering to certain constraints. These constraints include limiting any sector’s weight to within 5% of its weight in the parent index, as well as constraining the weight of any stock to within 2% of its weight in the parent index.
The resulting index has 90 constituents and is primarily exposed to the information technology (19.2%), consumer discretionary (14.7%), industrials (13.0%), health care (10.9%), and real estate (9.6%) sectors. Index reconstitution and rebalancing occur semi-annually.
The launch brings the number of iShares multifactor ETFs to seven with total assets under management of around $3.1 billion. Other funds in the suite utilize the same approach but target the global, international developed, emerging market, US broad market, US small-cap, and international small-cap equity universes.
Multifactor in demand
Multifactor strategies appear to be appealing to investors who wish to mitigate the cyclicality of individual factors and eliminate the need for factor timing. By diversifying across factors, multifactor strategies have historically smoothed volatility when compared to single-factor approaches.
According to FTSE Russell’s latest annual ESG & Smart Beta survey, the proportion of institutional asset owners who have adopted a multifactor strategy has grown from 49% in 2018 to 71% in 2019.
These strategies are also proving popular with new smart beta users as 69% of asset owners who have implemented a smart beta strategy for the first time within the last two years have opted for this approach.