Oppenheimer to launch range of dynamic multifactor ETFs

Jul 5th, 2017 | By | Category: Equities

Oppenheimer Funds has filed a request with the Securities and Exchange Commission (SEC) to list four new smart beta multifactor ETFs. The new ETFs will focus on US large caps, US small caps, developed world ex-US equities and emerging market equities.

Oppenheimer to launch range of dynamic multifactor ETFs

Oppenheimer already offers a range of revenue-weighted ETFs but the filing indicates a market-leading move into dynamic factor allocation ETFs.

The methodology of the new funds will target five factors: size, momentum (11-month trailing return), quality (leverage and profitability), value (cash-flow yield, earnings yield, country relative sales-to-price) and low volatility (5-year trailing volatility).

The funds’ exposure to the various factors will adjust dynamically depending on the current stage of the economic cycle – expansion, slowdown, contraction and recovery – as determined by Oppenheimer. The ETFs will be fully physically replicated and rebalanced monthly.

Different factors tend to perform better or worse depending on the stage of the economic cycle. Factors such as value and size tend to perform better in periods of economic expansion, while factors such as quality and low volatility tend to perform better in periods of economic contraction. The use of multifactor strategies rather than individual factor strategies is one way to smooth the effects of the economic cycle on factor investing while still harvesting the excess return potential of factors.

Up until now, bottom-up multifactor ETFs have used static allocations between factors, usually deploying them in equal weights to make a composite factor score for each security. The filing by Oppenheimer indicates that they are aiming to launch the first ETFs that dynamically tilts towards factors that have historically outperformed in the current stage of the economic cycle.

In the bottom-up approach to multifactor investing, each stock is given a separate score for its exposure relative to each factor, and these individual scores are combined to make a composite factor score which is used to rank and select securities. A top-down approach follows a fund-of-funds methodology and consists of a portfolio made up of separate, single factor indices made up of stocks chosen for their exposure to an individual factor.

Oppenheimer already has a range of seven revenue-weighted smart beta ETFs listed on NYSE Arca. The largest of these is the $665 million Oppenheimer Large Cap Revenue ETF (RWL), the $500m Openheimer Ultra Dividend Revenue ETF (RDIV) and the recently launched Oppenheimer ESG Revenue ETF which uses an ESG filter followed by a Sharpe ratio filter and finally weights stocks by top line revenue.

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