Advisors Learn a New ETF’s Investment Process

ETF Trends asked, “What’s Most Important to You When Considering a New ETF?” and the top choice with 51% of the vote was the ETF’s investment process. This choice was twice as popular as performance (25%) was, with cost (11%), tax efficiency (10%), and liquidity (3%) rounding out the selections. This was a pleasant surprise, since the conventional wisdom is that cost or performance is the deciding factor when sorting through the crowded ETF universe.

Indeed, there were a handful of products that came to market in the last few years seeking to stand out from a cost perspective, including the Invesco NASDAQ 100 ETF (QQQM) and the iShares Gold Trust Micro (IAUM). Yet, many new ETFs attempt to stand out for their unique approach even as they build out a longer-term performance record and demonstrate meaningful ETF level liquidity. Some of these have succeeded based on assets under management. 

The JPMorgan Equity Premium Income ETF (JEPI) is an actively managed fund that generates income by selling options on U.S. large-cap stocks. The fund invests in S&P 500 stocks that exhibit low volatility and value characteristics and sells options on those stocks to generate additional income. JEPI launched in May 2020 and already has $7.7 billion in assets.

The Dimensional US Core Equity Market ETF (DFAU) is another active equity ETF that launched in November 2020 and has $2.0 billion in assets. Dimensional takes a long-term all-cap approach but has increased exposure to the small companies with low relative price and high profitability.  

The Horizon Kinetics Inflation Beneficiaries ETF (INFL B-) came to market in January 2021 and invests in shares of companies that the active manager believes can benefit directly or indirectly from inflation, with exposure including exploration & production, mining, and brokerage companies. INFL has $1.3 billion in assets. 

Understanding the investment process is important for active ETFs that seek to outperform a cap-weighted index through discretionary decisions that do not follow a set schedule. However, it is also paramount with factor or thematic index ETFs that can complement the core market cap-weighted portion of many advisors’ portfolios. 

The iShares US Small Cap Value Factor ETF (SVAL), which launched in October 2020 and has $185 million in assets, is different from the $15 billion iShares Russell 2000 Value ETF (IWN A-). SVAL uses liquidity, risk, leverage, and sentiment screens and owns just 260 positions, significantly less than the more than 1400 inside the value-oriented small-cap ETF IWN. SVAL also has a lower expense ratio than IWN but modestly lagged its larger iShares cousin in the last 12 months, but the investment process is what makes the ETF most different.

The Global X CleanTech ETF (CTEC), which also began trading in October 2020, is a thematic ETF that invests in companies that stand to benefit from the increased adoption of technologies that inhibit or reduce negative environmental impacts. This includes companies involved in renewable energy production, energy storage, and smart grid implementation. CTEC has more than 40% of its assets in both the industrials and information technology sectors but holds some hefty stakes in Enphase Energy ENPH and Plug Power PLUG relative to what is found in market-cap weighted sector ETFs like the Industrials Select Sector SPDR (XLI A) and the Vanguard Information Technology ETF (VGT A+).

Each of these relatively new ETFs should be considered because of their unique approach, not just how they performed in their short lives or how much they cost. You can learn more about each of them and many more at our sister ETF platform.

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