Russell Expands Suite Of “Factor ETFs” With Ex-U.S. Funds

by on November 4, 2011 | ETFs Mentioned:

Russell, the longtime index provider in the midst of a major push into the ETF issuer business, continued the rapid expansion of its product lineup this week with the introduction of its first international equity funds. The company launched three new funds focusing on developed markets outside of the U.S., with each targeting exposure based on specific “factors.” The three new ETFs, which bring the company’s total to 24, are:

  • Developed ex-US High Momentum ETF (XHMO): This ETF is linked to the Russell-Axioma Developed ex-U.S. Large Cap High Momentum Index, a benchmark that are selected based on medium-term momentum, which is defined as cumulative return over the last 250 trading days, excluding the last 20 trading days. Top index components at the end of October included Royal Dutch Shell, Novo-Nordisk, and Vodafone.
  • Developed ex-US Low Volatility ETF (XLVO): This ETF seeks to replicate the Russell-Axioma Developed ex-U.S. Large Cap Low Volatility Index, which includes stocks that have exhibited low volatility over the last 60 days. Top index components at the end of October included Royal Dutch Shell, Vodafone Group, and Nestle.
  • Developed ex-US Low Beta ETF (XLBT): As the name suggests, this ETF will include stocks that maintain low betas relative to the broad Russell Developed ex-U.S. Large Cap Index. As of October 31, the top components included British American Tobacco, Nestle, and Novartis.

Each of the indexes to which these new ETFs are linked are well balanced; no one name in any of the benchmarks accounts for more than 3% of assets.

Factor ETF Investing: New Tools For Accessing Old Strategies

The strategies accessible through these new ETFs are, of course, nothing new; professional money managers have been implementing techniques designed to achieve targeted exposure to domestic and international stocks for decades. But the combination of these strategies with the exchange-traded structure is a relatively new development; so-called “factor” ETFs allow investors to achieve cheap and liquid exposure to strategies that would generally be expensive and time consuming to construct on their own. And there may be some appeal to using a rules-based system to achieve these objectives as opposed to a discretionary manager; because they seek to replicate specific indexes, these new ETFs should avoid “factor drift” that can skew the type of exposure actually delivered.

“The Russell-Axioma approach when developing these products was to seek true factor purity in the returns, not just factor exposure,” said Greg Friedman, managing director of Russell’s global ETF product group. “Investors may benefit from understanding their vulnerability to certain risk factors, and targeting these factors can provide them with a more focused portfolio and help manage unintended risks.”

Each of the three new ETFs charges an expense ratio of just 0.25%, making them cheaper than some of the “plain vanilla” products offering exposure to developed markets outside the U.S. The iShares MSCI EAFE Index Fund (EFA), for example, charges 0.35%.

Russell had previously launched ten domestic factor ETFs, including both large cap and small cap funds that segmented the Russell 1000 and Russell 2000, respectively. In addition to the three factors covered by the new international funds, other offerings offer access to high beta stocks and high volatility stocks:

Factor U.S. Small Cap U.S. Large Cap Developed Ex-U.S.
High Beta SHBT HBTA n/a
High Momentum SHMO HMTM XHMO
High Volatility SHVY HVOL n/a
Low Volatility SLVY LVOL XLVO

Last month, iShares rolled out a suite of international minimum volatility ETFs, including funds focusing on emerging markets (EEMV) and the EAFE region (EFAV). While there will probably be some similarity between EFAV and XLVO, the products will be far from perfect substitutes. For example, the new Russell ETF includes exposure to Canada, which is not a component of the EAFE region [see ETFs For The Forgotten Asset Classes].

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Disclosure: No positions at time of writing.