iShares, Ariz. Pension Team Up For New ETFs

April 18, 2013

iShares, the largest ETF provider in the world, today is launching five factor-based ETFs that mark two major milestones for the firm—three of the funds are being seeded with $100 million each by a pension fund, the Arizona State Retirement System, while the other two are the firm’s first real foray into active management.

More broadly, the whole suite of factor-based products being rolled out today is the result of a first-ever product development collaboration between iShares with end clients, from inception of an idea to construction to launch, Mark Carver, director and investment strategist at iShares, told IndexUniverse.

The actively managed element of this rollout also has the markings of the first real integration of parent company—and known global active manager—BlackRock into the until-now-all-passive iShares product line.

The funds being launched today include the iShares MSCI USA Momentum Factor Index Fund (MTUM), the iShares MSCI USA Size Factor ETF (SIZE) and the iShares MSCI USA Value Factor ETF (VLUE), which are constructed around the broad, market-capitalization-weighted MSCI USA Index.

Separately, iShares is also rolling out today two actively managed, factor-based funds: the iShares Enhanced U.S. Large-Cap ETF (IELG) and the iShares Enhanced U.S. Small-Cap ETF (IESM)—the firm’s first real foray into active strategies, Carver said.

Arizona Pension Fund And ETFs

The Arizona State Retirement System is the one seeding the three MSCI-linked ETFs with $100 million each.

For perspective, in its most recent 13F filing, submitted in February, the Arizona pension fund reported $6.8 billion of invested assets. That would put today’s seeding commitment at a sizable 5 percent of that pie.

Arizona’s decision to join iShares in the creation of these strategies is reflective not only of the growing ETF usage among large institutional investors, but also of pension funds’ increasing willingness to consider lower-cost passive instruments as they struggle to meet mandates in the current economic environment.

MTUM, SIZE and VLUE come with a price tag of only 0.15 percent in annual fees—a relatively low price tag for “enhanced beta” strategies even by ETF standards. They also will allow clients like pension funds the benefits of real-time tradability, as these institutions look to express tactical views.

What’s more, demand for factor-based strategies—these so-called enhanced beta that carve up the investment universe on the basis of specific factors; in this case, momentum, risk and value—is picking up pace as investors look for diversification at a time when correlations among assets are rising. Correlation among factors is often quite low.

“The attraction to factor investing generally is the ability to do return enhancement or risk reduction, or in some cases, both,” iShares’ Carver said. “The individual factors will be used to express a tactical view.”

The iShares MSCI USA Momentum Factor Index Fund (MTUM) tracks an MSCI benchmark that picks securities from the market-capitalization-weighted MSCI USA Index, with a focus on those that show higher momentum.


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