O’Shares Investments launches smart beta ETF targeting quality income

Jul 30th, 2015 | By | Category: Equities

Boston-based investment manager O’Shares Investments has launched its debut ETF, the O’Shares FTSE US Quality Dividend ETF (OUSA), a multi-factor smart beta equity strategy targeting high-yielding, quality companies.

O'Shares launch smart beta ETF targeting quality income

Kevin O’Leary, Chairman of O’Shares Investments

Through a combination of factor exposures (quality, low volatility and dividend yield), the ETF aims to deliver enhanced returns, lower volatility and provide a sustainable yield.

Designed as a core equity holding, the ETF is based on the FTSE US Qual / Vol / Yield Factor 5% Capped Index and marks the first in a series of ETFs O’Shares will be launching in partnership with index provider FTSE Russell.

“We believe now is an excellent time to provide individual and institutional investors with a set of efficient, transparent and cost effective index-based investment products that reflect our core investment principles. So we joined forces with leading global index provider FTSE Russell to launch our family of global index-based ETFs,” said O’Shares Chairman Kevin O’Leary.

Ron Bundy, CEO Benchmarks North America for FTSE Russell, added: “We are seeing growing demand in the investment community for more sophisticated indexes that can tap into market exposures efficiently and, in many cases, combine multiple factors. We are excited to introduce factor indexes that help clients like O’Shares target the specific exposures they seek.”

The ETF addresses the shortcoming of strategies based on dividend yield alone, which overlook the ability of the underlying companies to continue paying dividends. Through the introduction of a quality screen, the O’Shares fund seeks to avoid these higher risk companies. The quality screen assesses company profitability and leverage to identify those with the ability to generate strong future cash flows. This is complemented by tilting the portfolio towards low volatility stocks, measured by the standard deviation of their price movements. The result is a portfolio which assesses risk on two dimensions, fundamentals and returns.

O’Leary added: “As an investor, I want more income and less risk than in a generic index, and I want strong long-term performance. I strongly believe that OUSA has the potential to provide just that.”

By combining quality, low volatility and dividend yield factors the ETF should achieve diversification benefits compared to single factor products. Over long-term time periods these factors have historically provided risk and return enhancements versus market cap-weighted indices; however, the individual factors go through periods of relative underperformance. As the correlation between each factor has historically been low, combining multiple factors should smooth the time-varying nature of performance.

The fund provides exposure to a portfolio of large-cap and mid-cap US equities. As of June 23, 2015, the index included 140 stocks, selected from the parent FTSE USA Index, comprised of 600 of the largest US publicly-listed equities with an average weighted market capitalisation of $56 billion and a minimum market capitalisation of over $750 million. Individual index constituent weights are capped at 5% on a quarterly basis to avoid over-concentration in any single security.

The ETF has been listed on the NYSE Arca exchange and carries a gross expense ratio of 0.56%. O’Shares will be releasing four more ETFs based on the same methodology. These funds will be based on the Europe and Asia-Pacific equity universe and will be available in unhedged and US dollar-hedged versions.

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