BlackRock targets international small-caps with new ‘focused value’ factor ETF

Mar 26th, 2021 | By | Category: Equities

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BlackRock has launched a second ETF providing focused exposure to small-cap value stocks, this time targeting developed market companies listed outside of the US.

BlackRock targets international small-caps with new ‘focused value’ factor ETF

BlackRock has launched its second ETF providing focused exposure to the value factor within the small-cap equity segment.

The iShares International Developed Small Cap Value Factor ETF (ISVL US) has listed on Cboe BZX Exchange and comes with an expense ratio of 0.30%.

According to BlackRock, value and size factors have historically been rewarded during periods of economic recovery.

The asset manager notes that the nimble nature of small-caps means that they can adapt quickly to structural economic changes, while value stocks are particularly well placed to tap into pent-up demand created by the Covid-19 pandemic.

According to data from Morningstar, a rally in value stocks is well underway with the factor outperforming its broad market benchmark in both US and international markets since the announcement of the Pfizer vaccine in November 2020. This is after many years of relative underperformance.

Bob Hum, US Head of Factor ETFs at BlackRock, commented: “ISVL was launched to give investors more choice as they look to build efficient portfolios. While we have a variety of small-cap value ETFs available in the US, ISVL is the first iShares ETF to specifically target small-cap value exposure in international markets. We believe ISVL is a critical extension of our factor ETF line-up as it gives investors the ability to invest in historically rewarded factors beyond the US and can meet the growing demand for pro-cyclical exposure that can potentially benefit from a reopening of the economy post-Covid 19.”

Methodology

The fund is linked to the FTSE Developed ex-US ex-Korea Small Cap Focused Value Index which is based on the parent FTSE Developed ex-US ex-Korea Small Cap Index universe.

The methodology first removes companies ranked in the bottom 20% by liquidity as well as those ranked in the top 20% by risk (defined as one-year trailing volatility) and leverage. Firms with negative sentiment scores (based on expected earnings per share) and negative price momentum are also excluded.

The remaining constituents are then assigned a composite score based on value factor metrics including cash flow, book value, and net income relative to market capitalization. The methodology selects the stocks with the highest composite scores, targeting 25% of the number of constituents that make up the parent index.

Constituents are weighted by market capitalization while limiting the deviation in any country’s weight to 10% from its allocation in the parent index.

An index review takes place on a monthly basis but changes will only be made if the index’s weighted average composite value score falls below 90% of the score that could be achieved through reconstitution and rebalance.

BlackRock launched its first ‘focused value’ small-cap factor ETF in October of last year. This fund, the iShares US Small Cap Value Factor ETF (SVAL US), tracks the Russell 2000 Focused Value Select Index which applies broadly the same methodology to select and equally weight 250 stocks with the highest value factor exposure from the Russell 2000 Index. SVAL is listed on Cboe BZX Exchange and comes with an expense ratio of 0.20%. It currently houses $110 million in assets.

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