So far, the vast bulk of smart-beta and fundamental index ETFs have focused on broad products, with only a few covering individual industries. Last October, Manulife Financial Corp.’s (MFC) insurance and investment manager John Hancock was one of the first to bring sector-specific smart-beta funds to the market. Those ETFs covered financials, health care, consumer discretionary and technology.
With its latest set of five launches on March 29, John Hancock expands its sector set and completes the missing pieces of the Global Industry Classification Standard (GICS) puzzle.
Still Getting Cozy With Dimensional Fund Advisors
The John Hancock Multifactor Consumer Staples ETF (JHMS ), the John Hancock Multifactor Energy ETF (JHME ), the John Hancock Multifactor Industrials ETF (JHMI ), the John Hancock Multifactor Materials ETF (JHMA ) and the John Hancock Multifactor Utilities ETF (JHMU ) use factor weighting into their respective sectors.
The real kicker for the new ETFs is who is doing the weighting.
As with Hancock’s previous smart-beta funds, the five new sector ETFs will use Dimensional Fund Advisors developed indexes. Dimensional has been doing the smart-beta thing for nearly three decades and based much of its expertise on academic research conducted by world-famous economists Eugene Fama and Ken French. Both economists still have positions within the firm and they were some of the first and most successful managers to explore multi-factor and rules-based investing. As a result, Dimensional’s line up of select advisor-sold mutual funds have been some of the best-returning funds in the market and have gathered nearly $390 billion in assets.
Its funds are definitely a case of smart-beta actually being “smart.” The five new ETFs should be no different.
The underlying indexes – the John Hancock Dimensional Consumer Staples Index, the John Hancock Dimensional Energy Index, etc. – will screen for metrics such as consistent profitability, lower relative price-earnings, price-book value, and other various value metrics. The indexes will also focus on smaller market-cap stocks through a capped equal-weight strategy. That insures that no one stock becomes too large for the fund’s holdings. For example, a traditional energy index may have double-digit exposure to an oil company like Chevron (CVX), JHME only has 6% exposure to the integrated giant.
Further, Dimensional’s parent index cast a much broader net than an index like the large-cap S&P 500. The parent index to John Hancock’s new smart-beta funds also includes exposure to mid-cap stocks. This provides exposure to small and faster-growing firms. This is one of the major points that Fama and French’s academic work hit on when looking at higher returns. However, even with the equal weighting, John Hancock’s new ETFs are still very much large-cap funds.
As for expenses, the suite of new funds varies. John Hancock has put waivers in place to keep expenses at just 0.50%, or $50 per $10,000 invested, for the time being. That makes the ETFs pretty cheap offerings in general, forgetting about those that they have a smart-beta tilt to them. While that’s not as cheap as Dimensional’s mutual funds, those average around 0.20% in expenses, the new ETFs still provide a low-cost way to tap the exclusive manager.
The Bottom Line
All in all, the suite of five sector funds helps complete the puzzle at John Hancock. Investors now have the opportunity to add a dose of fundamental factors to their sector selection when crafting their portfolios. The beauty of Hancock is that investors can now do it while tapping one of the best managers in the business. Even better, they can do it relatively cheaply.