A sheep in wolf’s clothing? SIZE’s low-vol twist defies easy categorization.
With an abundance of complex factor-based ETFs on the market, the iShares MSCI USA Size Factor ETF (SIZE | B-78) seems to play it straight, based on its name. After all, the size factor—a bias toward smaller firms—is well established (along with the style factor) by seminal research from Eugene Fama and Ken French.
But SIZE isn’t quite what it seems on the surface. Despite its name and ticker, the fund does not screen for size. SIZE holds every stock in its large- and midcap parent index, but reweights the stocks by volatility; that is, stocks with lower volatility receive higher weight.
Specifically, the fund looks at the variance (the square of standard deviation) of each stock’s weekly returns over the past three years, scaling the inverse of each stock’s variance by the sum of the portfolio’s inverse variance. That sounds more complicated than it is: SIZE is simply a portfolio of large- and midcap stocks weighted by low vol.
I dwell on the mechanics here to argue that SIZE is worth comparing to a low-vol fund as well as a traditional size-factor fund.
For the low-vol fund, I’ll use the iShares MSCI USA Minimum Volatility ETF (USMV | A-56). USMV relies on classic portfolio math and an optimizer to deliver a low-volatility portfolio. In contrast, SIZE is a portfolio of low-vol stocks, akin to the PowerShares S&P 500 Low Volatility ETF (SPLV | A-45) in this respect. Still, USMV and SPLV weed out many stocks that don’t make the cut, while SIZE holds its full parent basket and only weights by volatility.
Does this make SIZE a kindler, version gentler version of USMV? In many ways, yes, based on the table below.
SIZE splits the difference with USMV when compared with our benchmark: on risk, on the number of significant sector biases, and on the ETF.com Fit score—a comprehensive measure of alignment with the market. In the recent upmarket over the past 12 months, you’d expect the returns of the more risk-averse fund (USMV) to lag more than the comparatively less-risk-averse fund (SIZE), and that’s exactly what we see.