Deutsche unveils Russell 2000 smart beta ETF

Jul 5th, 2016 | By | Category: Equities

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Exchange-traded fund provider Deutsche Asset Management (Deutsche AM) has launched its fourth US-listed multi-factor ETF. The Deutsche X-trackers Russell 2000 Comprehensive Factor ETF (NYSE Arca: DESC) is a smart beta equities fund that favours companies within the Russell 2000 Index with strong exposure to targeted investment style factors: value, momentum, quality, low volatility and size.

Deutsche unveils Russell 2000 smart beta ETF, fourth in US equities multifactor suite

Fiona Bassett, Head of Passive in the Americas for Deutsche Asset Management.

Fiona Bassett, Head of Passive Strategy in the Americas, commented in a statement: “DESC, focusing on small cap US stocks, is a logical addition to our Deutsche X-trackers Comprehensive Factor ETFs suite, which is based on an intelligently designed index construction mechanism that takes into account five investment factors.

“Academic research has identified certain stocks’ characteristics that are important in explaining a stock’s risk and performance. Emphasising these factors can potentially make a significant contribution to outperforming traditional market capitalisation-weighted benchmark indices.”

While an increasing amount of research is being published confirming that individual factor exposure may enhance Sharpe ratios compared to market cap-weighted approaches, there is a lack of compelling evidence supporting the most appropriate timing to adopt each exposure. As such, multi-factor strategies seek to provide access to at least one outperforming factor at any stage in the economic cycle while also smoothing returns compared to any single factor approach.

The ETF tracks the Russell 2000 Comprehensive Factor Index, an alternatively weighted composition of the Russell 2000 Index, the most widely quoted measure of the performance of the small-cap to mid-cap shares of US-listed firms.

The index strategy works by assigning each constituent in the Russell 2000 Index a cumulative factor score based on its relative performance across five factors: momentum (defined as its cumulative 11 month return), quality (a composite of profitability, efficiency, earnings quality and leverage), size (defined as normalised full market capitalisation), value (a composite of cash flow yield, earnings yield and price-to-sales ratio) and volatility (defined as the standard deviation of five years worth of weekly local total returns). Each firm’s market weight is combined with its composite factor score, and all weights are re-scaled to arrive at the constituents’ final weights in the Comprehensive Factor Index.

As of 30 June 2016 the fund has significant exposure to the financials (34.1%), industrials (17.5%), consumer discretionary (15.7%), information technology (10.0%) and health care (8.1%) sectors.

The fund has a total expense ratio (TER) of 0.30%.

Deutsche AM rolled out its US multi-factor suite late last year with the Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSE Arca: DEUS) (TER: 0.25%) and the Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSE Arca: DEEF) (TER: 0.35%), which applies the same methodology as DESC to US large cap stocks and developed international stocks respectively. The launch of Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSE Arca: DEMG) (TER: 0.50%) earlier this year expanded the suite to include exposure to emerging market equities.

The new fund will compete directly with other US multi-factor small cap ETFs such as the the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ) (TER: 0.39%), and the iShares Edge MSCI Multifactor USA Small-Cap ETF (SMLF) (TER: 0.50%).

Multi-factor investing has experienced a surge in popularity in recent years as an increasing body of research highlights the out-performance of several smart beta strategies compared to market cap-weighted alternatives. This has lead to several fund launches by leading ETF providers. US-based investors seeking to adopt the strategy with global, international or emerging market exposure may wish to consider the following ETFs:

iShares Edge MSCI Multifactor Global ETF (ACWF). TER – 0.50%
SPDR MSCI World Quality Mix ETF (QWLD). TER – 0.30%
Franklin LibertyQ Global Equity ETF (FLQG). TER – 0.35%

iShares Edge MSCI Multifactor International ETF (INTF). TER – 0.45%
iShares Enhanced International Large-Cap ETF (IEIL). TER – 0.35%
SPDR MSCI EAFE Quality Mix ETF (QEFA). TER – 0.30%
PowerShares S&P International Developed Quality Portfolio (IDHQ). TER – 0.49%
PowerShares FTSE RAFI Developed Markets ex-US Portfolio (PXF). TER – 0.46%
First Trust Developed Markets Ex-US AlphaDEX Fund (FDT). TER – 0.80%
Franklin LibertyQ International Equity Hedged ETF (FLQH). TER – 0.40%

iShares Edge MSCI Multifactor Emerging Markets ETF (EMGF). TER – 0.65%
SPDR MSCI Emerging Markets Quality Mix ETF (QEMM). TER – 0.30%
PowerShares FTSE RAFI Emerging Markets Portfolio ETF (PXH). TER – 0.49%
First Trust Emerging Markets AlphaDEX Fund (FEM). TER – 0.80%
Franklin LibertyQ Emerging Markets ETF (FLQE). TER – 0.55%

Multi-factor investing has also gained momentum with European investors, with suites of ETFs provided by issuers such as iShares, Lyxor, Amundi and Source. Some of the UCITS-compliant funds to cover the space include:

iShares Edge MSCI World Multifactor UCITS ETF (IFSW LN). TER – 0.50%
iShares Edge MSCI USA Multifactor UCITS ETF (IFSU LN). TER – 0.35%
iShares Edge MSCI Europe Multifactor UCITS ETF (IFSE LN). TER – 0.45%

Lyxor JP Morgan Multi-factor Europe Index UCITS ETF (LYX5 LN). TER – 0.40%
Lyxor JP Morgan Multi-factor World Index UCITS ETF (LYXW LN). TER – 0.40%

Amundi ETF Global Equity Multi Smart Allocation Scientific Beta UCITS ETF (SMRT FP). TER – 0.40%

Source Goldman Sachs Equity Factor Index Europe UCITS ETF (EFIE LN). TER – 0.55%
Source Goldman Sachs Equity Factor Index World UCITS ETF (EFIW LN). TER – 0.65%

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