BlackRock expands smart beta line-up with US equities ETFs

Oct 15th, 2016 | By | Category: Equities

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BlackRock has expanded its range of iShares smart beta exchange-traded funds with the launch of four US equities ETFs. Each fund tracks an MSCI index targeting broad US equities exposure while seeking to enhance risk-adjusted returns by tilting towards one of four factors: value, low size, momentum or quality.

iShares expands smart beta line-up with four factor-based US equity ETFs

According to BlackRock research, the European factor and smart beta fund industry has grown by 40% since the start of the year, surpassing $30bn in AUM.

Historically these factors have been drivers of outperformance over the long run, although each factor has undergone stages of underperformance relative to its market cap-weighted benchmark. Due to low correlations between factor returns, investors may wish to consider diversifying across several factors to smooth short‐term volatility and mitigate the issue of lengthy or steep underperformance.

Each ETF has a total expense ratio (TER) of 0.20% and may be bought with US dollar- or British pound-denominated share classes.

For comparison purposes below, the return on the MSCI USA Index year-to-date (YTD) is 4.2% while its per annum return over the past three years is 7.7%. As noted below, each ETF’s US-listed equivalent has been able to successfully outperform its broad market benchmark over these time periods.

Value

The iShares Edge MSCI USA Value Factor UCITS ETF (LON: IUVL) seeks greater exposure to undervalued stocks based on their fundamentals. The ETF tracks the MSCI USA Enhanced Value Index.

As of 14 October 2016 the ETF has 142 holdings with an average price-to-book ratio of 1.68x. The largest sector exposures are information technology (21.8%), financials (16.4%), healthcare (13.6%), consumer discretionary (12.5%) and industrials (9.9%), and the top holdings are Apple (6.3%), Intel (4.8%), Cisco Systems (4.3%) and Walmart (3.9%).

The US-based version of this fund has returned 5.7% year-to-date and 8.7% per annum over the past three years.

The fund will compete with the SPDR MSCI USA Value-weighted UCITS ETF and the UBS MSCI USA Value UCITS ETF which have TERs of 0.25% and 0.20% respectively.

Low Size

The iShares Edge MSCI USA Size Factor UCITS ETF (LON: IUSZ) seeks greater exposure to smaller capitalisation companies through tracking the MSCI USA Mid-Cap Equal Weighted Index. Studies have shown that, over the long run, a portfolio of smaller company stocks will get rewarded for the additional risk underlying these firms versus the broad market.

The fund has 317 holdings of which the largest single holding has approximately a half a percent exposure in the portfolio. The largest sector exposures are consumer discretionary (19.3%), information technology (17.3%), industrials (13.2%), financials (12.2%) and healthcare (8.1%).

Its US-based equivalent is up 7.3% YTD and 11.3% per annum over three years.

Momentum

The iShares Edge MSCI USA Momentum Factor UCITS ETF (LON: IUMO) seeks exposure to stocks that exhibit the strongest risk-adjusted performance over the last 6 and 12 months. It tracks the MSCI USA Momentum Index. Momentum-based investing relies on the notion that investors will continue to support rising stocks, exploiting several theories of behavioural finance such as ‘herd instinct’.

The fund has 121 holdings with significant exposure to the information technology (20.4%), consumer discretionary (17.2%), healthcare (16.2%), consumer staples (14.4%) and utilities (9.9%) sectors. The largest holdings are Amazon (5.8%), Facebook (5.4%), Johnson & Johnson (5.1%), AT&T (5.0%), and Home Depot (3.7%).

Its US-based equivalent is up 4.8% YTD and 14.1% per annum over three years.

Quality

The iShares Edge MSCI USA Quality Factor UCITS ETF (LON: IUQA) seeks exposure to companies with strong balance sheets and stable earnings through tracking the MSCI USA Sector Neutral Quality Index. The strategy maintains that strong balance sheet companies exhibit lower risk and are in stronger financial positions to withstand tough economic periods relative to the broad market.

The fund has 124 holdings with significant exposure to information technology (21.8%), financials (14.9%), healthcare (14.6%), consumer discretionary (12.5%), and consumer staples (10.2%) sectors. The largest single holdings are Johnson & Johnson (6.0%), Apple (4.9%), Pepsico (4.9%), Microsoft (4.5%) and Berkshire Hathaway (3.9%).

Its US-based equivalent is up 4.8% YTD and 11.8% per annum over three years.

It will compete with the UBS Factor MSCI USA Quality ETF which has a TER of 0.25%.

 

According to BlackRock Business Intelligence, 30 September 2016, the European factor and smart beta fund industry has surpassed $30bn in AUM, having grown its asset base by 40% since the start of the year. According to the report the largest users, in terms of assets dedicated to these strategies, are investors in Germany, Switzerland and the UK.

The iShares Edge S&P 500 Minimum Volatility UCITS ETF (LON: SPMV) has attracted over $1bn worth of inflows year-to-date, the highest rate across all European-domiciled smart beta funds, highlighting investors desire for new tools to navigate market uncertainty. Dividend-weighted approaches have also been in demand as investors seek ways to enhance income in a persistent low yield environment.

According to BlackRock’s report however, all strategies have shown an uptick in demand from a wider range of institutional investors as well as greater activity in the advisor wealth space.

Manuela Sperandeo, Head of iShares EMEA Specialist Sales at BlackRock, commented: “Faced with growing political uncertainty, market volatility and low yields, investors tell us that they want a comprehensive set of tools with which to diversify risk in their portfolios.

“…these four funds complement our European equity and global equity factor range allowing investors to express their views on the major global developed equity markets.”

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