UBS Global Asset Management, a leading European exchange-traded fund issuer, has rolled out a suite of smart beta equity ETFs that allow investors to target specific factor exposures within the eurozone and the US.
UBS has listed eight factor-based ETFs focused on value, quality, yield and low volatility offering exposure to the US and the eurozone.
The funds provide a tool for investors to tilt their portfolio towards factor exposures (value, low volatility, quality and shareholder yield) which have historically provided excess returns over market capitalisation-weighted indices.
As such factors are often targeted by active fund managers, investors can use these factor-based ETFs to replace, or manage the risk of, existing funds in their portfolio.
“The new UBS factor ETFs complement many portfolios well within the strategic asset allocation and contribute to improved diversification,” said Dag Rodewald, Head of UBS ETFs for Germany and Austria. “They can also be used tactically, as the form of the factor premiums does not remain constant over time. Our range of ETFs on various factors and for two of the world’s most important economic regions provides investors with the greatest possible flexibility.”
According to UBS, the ETFs are based on the factor premium concept developed by financial market researchers Kenneth French and Eugene Fama, among others. “This concept has shown that historically certain factors have systematically contributed to excess returns relative to the overall market,” said Rodewald.
The four factor strategies are offered across two separate currency regions: the eurozone and the USA. Studies have shown that factors which are not influenced by currency movements stand out more clearly when compared with factor indices from different currency zones.
The UBS ETF – Factor MSCI USA Prime Value UCITS ETF and the UBS ETF – Factor MSCI EMU Prime Value UCITS ETF are based on the MSCI Pure Value Indices developed by index provider MSCI. These indices select and weight holdings based on measures of fundamental value. Key valuation metrics such as price-to-book value and price-to-earnings are used to achieve this. The methodology also employs a quality screen to avoid companies which are undervalued due to weak balance sheets. These companies are often referred to as “value traps”.
The UBS ETF – Factor MSCI USA Low Volatility UCITS ETF and the UBS ETF – Factor MSCI EMU Low Volatility UCITS ETF are based on MSCI Select Dynamic 50% Risk Weighted Indices and provide investors with access to equities with an especially low level of volatility. Constituents are selected and weighted based on the historical variability of their stock price; the lower a constituent’s volatility the higher the weighting it will receive. By design, the resulting index should provide downside protection. Interestingly, however, low-volatility strategies have also tended to outperform higher-volatility stocks over the long-term.
The UBS ETF – Factor MSCI USA Quality UCITS ETF and the UBS ETF – Factor MSCI EMU Quality UCITS ETF are based on MSCI Quality Indices. These indices seek to select and weight constituents based on fundamental measures of quality. Companies with a relatively high level of return on equity, minor fluctuations in earnings and a low leverage ratio will be favoured.
The UBS ETF – Factor MSCI USA Total Shareholder Yield UCITS ETF and the UBS ETF – Factor MSCI EMU Total Shareholder Yield UCITS ETF follow the MSCI Total Shareholder Yield Indices which provide investors with a strategy focused on the capital return to their shareholders – for example through above-average dividend distributions or share buy-back programs.
These funds will likely compete with the iShares, Lyxor and Deutsche AWM suites of factor ETFs which are based on the minimum-volatility, quality, size, value and momentum factors.
The ETFs have initially been listed on the Xetra segment of Deutsche Börse, with a London Stock Exchange listed scheduled to follow. The eurozone-based funds have a 0.28% total expense ratio (TER) while the USA funds come in at 0.25% TER.