iShares Makes Big Bet On Multifactor ETFs

June 02, 2016

BlackRock’s iShares recent launch of nine multifactor sector exchange-traded funds represents a big bet on smart beta being an important part of investors’ future portfolio construction.

Additionally, the firm unveiled a new website about factor investing and a smart-beta guide. The world’s largest smart-beta ETF provider also rebranded its current factor-based funds under the name “iShares Edge.” Including the nine new multifactor sector funds, the iShares Edge suite comprises eight single-factor, 15 multifactor, 11 minimum-volatility and one fixed-income ETF, representing more than $28 billion in assets under management. 

Rob Nestor, head of iShares smart beta strategy at BlackRock, spoke to ETF Report about what the ETF provider sees in the space.

Why did iShares launch sector-based multifactor ETFs?
Sectors remain often the first entree for investors into ETFs in general. It’s a place where they frequently test out ETFs if they’re relatively unfamiliar with them. We think our multifactor approach highlights these factors that have outperformed the market in the long term and make a lot of sense in the sector space. We think it’s a great chance to distinguish ourselves in that category and differentiate ourselves with an approach that demonstrates a long-term ability to add value over the broader asset class.

What have investors and fund managers asked you for regarding multisector smart-beta funds?
There are a couple of home offices in the retail space that have indicated interest because they’re frequent model builders. They’re also [into] smart beta aggressively across the board beyond sectors. And they thought that intersection made sense. People are much more interested in a broad asset-class offering in that category, and it’s dominating our discussions across the traditional financial advisors (FAs), across institutions and those home offices.

What type of investor/manager is asking about multisector smart-beta funds?

Across the board, people are asking, but I wouldn’t say it’s overwhelming that people are asking about multifactor sectors. We’re a bit ahead of what we think people are going to want.

A “build it and they will come” sort of thing?
Exactly. The two categories we have had the most communicated interest in are the minimum-volatility category and multifactor. We built ours in a way that’s a little different from the rest of the smart-beta universe. We believe minimum-volatility strategies are primarily a risk-mitigating strategy. Those are not about trying to outperform.

Then there are individual or return-seeking factors. On an individual basis, our multifactor approach is specifically designed to outperform the market with a comparable risk of the market. And so when you think of the classic risk/return chart, minimum volatility is about going left—same return, less risk. Multifactor strategies are going north—same risk, greater return. And those are very distinct portfolio objectives. Those decisions should be made at the portfolio level, not within that product.

These funds seem to be pretty similar to the Hancock Dimensional Fund Advisors smart-beta funds sector funds. What audience are you targeting?
We’re targeting primarily sector allocators and model builders with sectors in mind, so that can be for the retail home office models that a lot of the FAs follow, or asset managers that utilize them as part of a top-down asset allocation model. Or asset managers that are more bottoms-up that don’t utilize all the sectors. They tend to put on bets in the most efficient way possible within a portfolio that would complement single-security holdings. They will often use sector ETFs to efficiently make that call on technology or financials or what have you.

 

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