With the global economy presently going through a tough phase and volatility taking the center stage, issuers are increasingly cautious about their issuances and look to deploy quality factors as much as possible.
After all, be it developed economies, emerging nations or commodities and currencies, shocks can be felt everywhere. Even the U.S. economy which grew at the 11-year best clip in the third quarter of 2014 started delivering faltering data points to start 2015.
Such a backdrop definitely sets the stage for the launch of multi-factor ETFs on the wide spectrum of regions and capitalization. State Street has already been enthralled by the ‘quality’ theme in ETF offerings having launched a dozen of quality mix ETFs across the board.
Now, iShares – the largest ETF issuer – has filed for four ETFs targeting factors like quality, value, momentum and size. Ticker symbols and expense ratios of the funds not yet been disclosed, but let’s take a look at what we do know about these proposed ETFs below:
Proposed ETFs in Focus
iShares MSCI USA Multi-Factor ETF: The fund looks to track the performance of the MSCI USA Diversified Multi-Factor Index and have exposure of domestic large-and-mid cap stocks. It goes without saying, that as per the issuer’s target, the stocks need to have high scores on the aforesaid multi-factor measures.
The issuer will keep a tally of value stocks on the basis of favorable forward share price to earnings, share price to book value and enterprise value to operating cash flow. The ‘quality’ score is decided on variables like return-on-equity, debt-to-equity and earnings variability. As of October 31, 2014, the index comprised about 135 U.S. companies.
Competition: SPDR MSCI USA Quality Mix ETF, which might give the proposed iShares’ ETF a run for money, is awaiting an approval. At the current level, iShares operates iShares MSCI USA Quality Factor ETF (NYSE:QUAL) which, though not exactly the same as the newly filed fund, seeks to be a high-quality ETF by judging stocks on metrics including high ROE, stable year-over-year earnings growth and low financial leverage. The fund is quite popular too having accrued about $795 million in assets.
iShares MSCI USA Small-Cap Multi-Factor ETF: The fund seeks to provide exposure to small companies across the U.S. by tracking the performance of the MSCI USA Small Cap Diversified Multi-Factor Index. The stocks are screened on the aforementioned measures.
Competition: iShares appears to take a wise decision to have applied for such a fund. Though small-cap space is filled with age-old products, no such multi-factor products are available to date.
iShares MSCI Global Multi-Factor ETF: The fund looks to track the large and mid-cap stocks from the developed and emerging markets having desired scores on multiple factors. This is done by tracking the MSCI ACWI Diversified Multi-Factor Index. As of October 31, 2014, the index had exposure to 560 companies.
Competition: This fund will likely get tough competition from SPDR MSCI World Quality Mix ETF (QWLD) which intends to produce a lower realized volatility level by tracking the MSCI World Quality Mix. Market Vectors’ MSCI International Quality ETF (QXUS) is another close competitor of the fund. Apart from these, the likes of iShares’ own fund MSCI All Country World Minimum Volatility Index Fund (NYSE:ACWV) and FlexShares’ International Quality Dividend Index Fund (NYSE:IQDF) can act as distant peers.
iShares MSCI Emerging Multi-Factor ETF: Despite filing for a global ETF, the issuer seeks to launch a specific emerging market ETF which looks to track the {{o|MSCI Emerging Markets}} Diversified Multi-Factor index. As of October 31, 2014, the underlying index had about 186 companies from the 21 emerging countries. Consumer discretionary, financials and information technology companies dominate the index.
Competition: SPDR MSCI Emerging Markets Quality Mix ETF (QEMM) appears the nearest competitor of the proposed fund. Potential threat is also posed by FlexShares Morningstar Emerging Market Factor Tilt Index ETF (NYSE:TLTE).
Bottom Line
We expect all the four ETFs to earn considerable investor attention, once approved, given the issuer’s long-standing repute and experience in rolling out similar products. However, iShares needs to be careful about fixing the expense ratio since another big issuer – SPDR – is also warming up to hit the multi-factor quality ETF space).