There’s no denying the appeal of using smart-beta strategies when it comes to investing. Investor interest in smart beta has exploded because of that appeal and the potentially higher returns that come from using factors.
And Wall Street is more than happy to oblige portfolios with new funds. In recent years, the number of smart-beta ETFs and the amount of money in such products have skyrocketed.
This week’s slew of launches builds on that momentum.
| Ticker | Name | Issuer | Launch Date | ETFdb.com Category | Expense Ratio |
|---|---|---|---|---|---|
| (RNDM ) | First Trust Developed International Equity Select ETF | First Trust | 06/20/2017 | Foreign Large Cap Equities | 0.65% |
| (RNEM ) | First Trust Emerging Markets Equity Select ETF | First Trust | 06/20/2017 | Emerging Markets Equities | 0.77% |
| (RNLC ) | First Trust Large Cap US Equity Select ETF | First Trust | 06/20/2017 | Large Cap Blend Equities | 0.60% |
| (RNMC ) | First Trust Mid Cap US Equity Select ETF | First Trust | 06/20/2017 | Mid Cap Blend Equities | 0.60% |
| (RNSC ) | First Trust Small Cap US Equity Select ETF | First Trust | 06/20/2017 | Small Cap Blend Equities | 0.60% |
| (RNDV ) | First Trust US Equity Dividend Select ETF | First Trust | 06/20/2017 | Large Cap Blend Equities | 0.50% |
| (USMF ) | WisdomTree U.S. Multifactor Fund | WisdomTree | 06/29/2017 | Large Cap Blend Equities | 0.28% |
First Trust Goes Big
The big boys of the ETF marketplace sit on a very successful tier of fund sponsors that made a name for themselves using smart beta strategy long before it was a catchy marketing buzzword. And on that list, First Trust is one of the more dominating issuers. But surprisingly, First Trust didn’t offer any multi-factor funds. Most of its previous ETFs focused on a single sector or the use of active management to pick and choose stocks/bonds.
With its latest suite of ETFs, this has changed. The investment manager’s group of six launches – First Trust Developed International Equity Select ETF (RNDM ), First Trust Emerging Markets Equity Select ETF (RNEM ), First Trust Large Cap US Equity Select ETF (RNLC ), First Trust Mid Cap US Equity Select ETF (RNMC ), First Trust Small Cap US Equity Select ETF (RNSC ) and First Trust US Equity Dividend Select ETF (RNDV ) – fleshes out its lineup and creates a full portfolio of core smart-beta funds.
The funds all follow a similar index and approach to building out their portfolios. All will feature new indexes using Nasdaq Riskalyze Index Methodology. Each ETF will screen the larger universe for their respective market cap and locations for various factors including dividends, quality and volatility requirements. The international pair – RNDM and RNEM – will focus more on volatility, while the domestic funds – RNLC, RNMC and RNSC – will hone in on dividends when crafting their indexes. That’s because foreign dividends tend to be a set percentage of profits rather than a set amount. During screening, dividend cuts from foreign firms could negatively impact their scores, when in reality that’s not a problem.
The new indexes will then equal-weight holdings and cap sectors and country weightings to ultimately build out their portfolios.
The result is that investors now have a core portfolio of “diversified, value-added exposure to broad equity market categories” designed to outperform regular indexes.
The wild card in the launch is RNDV. As its name suggests, RNDV focuses on dividends and adds additional screens to craft a portfolio of “better” dividend payers. The ETF further includes a screen to weed out those stocks yielding less than the NASDAQ 500.
In the end, First Trust has a potentially great core lineup on its hands that should be able to compete with other smart-beta players.
For a list of all First Trust’s ETFs, look here.
WisdomTree Goes Bigger
And speaking of those other smart-beta players, WisdomTree was one of the first players to use fundamentals in its ETFs. And like First Trust, strangely absent from its lineup was a “traditional” multi-factor fund. With the launch of the WisdomTree U.S. Multifactor Fund (USMF ), investors now have an all-in-one ETF to hone in on WisdomTree’s best ideas.
USMF will track a new index that will target multiple smart-beta factors to generate an excess return and reduced volatility. The ETF will screen over 8,000 stocks and assign scores for two fundamental factor groups. Group one includes screens for value and quality measures, while group two focuses on technicals like momentum and low correlation. Stocks are assigned a composite score based on these two groups. The top 200 scoring companies make the cut.
However, WisdomTree isn’t done. The fund will then screen for volatility and use a risk-adjusted weighting system to finally choose and weight its holdings.
In the end, USMF uses all of WisdomTree’s best tricks to craft a portfolio of U.S. large- and mid-cap stocks that should outperform the broader market. With an expense ratio of 0.28%, or just $28 per $10,000 invested, USMF could be a game changer for the fund manager, and find its way into a lot of portfolios.
For a list of all new ETF launches, take a look at our ETF Launch Center.
The Bottom Line
This week, two smart-beta pioneers filled a glaring hole in their respective lineups. Namely, a broad-based multi-factor ETF. With the addition of USMF and First Trust’s suite of funds, investors now have the ability to build out a full smart-beta core portfolio using some of the best in the business.
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