Smart Beta ETFs Tilt Target Date Funds

May 17, 2017

Todd Rosenbluth is director of ETF and mutual fund research at CFRA.

Asset managers have been advocating the usage of index-based products focused on minimum volatility, quality, momentum and other factors in recent years, suggesting that these were better ingredients for portfolio construction.

In recent months, some of them have taken the logical next step and put these smart-beta products to use in their own kitchens.

In November 2016, BlackRock renamed its “LifePath Active” target-date series “BlackRock LifePath Smart Beta,” and reconstructed the portfolios to incorporate the funds’ minimum volatility and multifactor U.S. and international equity ETFs as well as its own fixed-income ETFs.

Target Date Dictates Exposure

The exposure to equity and fixed-income asset classes, as well as the use of factor products, differs depending on the target-date year.

Sara Shores, global head of smart beta for BlackRock, explained that nearer-term target-date strategies have higher exposure to the more defensive low-volatility ETFs, such as the iShares Edge MSCI Min Volatility EAFE ETF (EFAV) and the iShares Edge MSCI Min Vol USA ETF (USMV).

However, Shores noted that the longer-term target-date portfolios have greater exposure to the more return-seeking iShares multifactor ETFs, such as the iShares Edge MSCI Multifactor Intl ETF (INTF) and the iShares Edge MSCI Multifactor USA (LRGF); these products combine quality, value, momentum and size factors in one ETF.

For example, at the end of April, the BlackRock LifePath Smart Beta 2020 Fund (BAPCX) had 38% of assets in EFAV and USMV, and 12% in INTF and LRGF. In contrast, the BlackRock LifePath Smart Beta 2040 Fund (BAPHX) had 61% of assets in INTF and LRGF, but 20% in these two minimum-volatility products.

Equity Factor Exposure in BlackRock LifePath

Source: BlackRock, April 28, 2017

 

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