Source, the London-based ETF issuer set to be acquired by Invesco, has announced the forthcoming closure of its FTSE RAFI Equity Income ETF series. In a letter to shareholders, Source advised that the three funds would be terminated on 14 June 2017.
Source has announced the closure of its FTSE RAFI Equity Income ETFs, a little over a year since their launch.
Launched in March 2016, the ETFs track indices designed in collaboration with index provider FTSE Russell and smart beta research house Research Affiliates with the objective of targeting high-dividend-paying, high-quality stocks with sustainable income streams. The series includes US, European and UK funds.
The methodology behind the indices first screens for companies with an above-median dividend yield versus their parent index universe. It then assesses the resultant stocks’ financial sustainability using measures of profitability, distress and accounting quality, with the lowest ranked quintile of companies excluded from the index.
The indices use an alternative weighting scheme which weights constituents by fundamental size and dividend yield, rather than market capitalisation. In comparison to traditional market capitalisation-based indices, which weight constituents according to a company’s market valuation, the indices focus instead on a company’s footprint in the economy. Through severing this link with price the indices set out to avoid systematically over-weighting companies that are overvalued. This is in keeping with Research Affiliates findings which show that long-term returns can be improved by using constituent weightings based on fundamental characteristics.
Despite the sophisticated investment approach, the funds have failed to accumulate sufficient assets and currently have a little over $20 million in AUM between them. The “continued existence and operation of the funds is not economically viable,” said Jane Drew, head of corporate communications at Source.
While the funds bear some similarity, in terms of style and objective, to Invesco PowerShares‘ more established FTSE RAFI and high dividend / low volatility ranges, Source asserts that the decision to terminate the funds was not influenced by its takeover by Invesco.
According to Drew, “the decision to close the funds was made significantly in advance of the Invesco news.”
She said, “business as usual prevails for both organisations until the transaction is completed following regulatory approval – so the closure of these funds is in no way related to the Invesco transaction.
“In general, the product ranges of [Source and Invesco] have minimal overlap and are highly complementary.”