Factor ETFs In Demand

September 15, 2020

Key Takeaways

 

Fundamental Context

U.S. dividend & fundamental ETFs have incurred redemptions. CFRA breaks the U.S. equity ETF category into six subcategories. Broad market and size ETFs, such as those tracking the S&P 500 Index and other market-cap-weighted indices, pulled in $38 billion of net inflows year to date through Sept. 8, according to CFRA’s First Bridge ETF database. However, dividend and fundamental products had $4.1 billion of net outflows as the impact of COVID-19 put dividends under pressure.

A second alternatively weighted factor and thematic ETF subcategory pulled in $9.8 billion in new money this year, aided by value and momentum factor ETFs, even as many popular lower volatility ETFs incurred sizable redemptions. These two subcategories, along with U.S. style ETFs ($7.8 billion of net inflows), consist of funds that commonly are referred to as smart beta.

Environmental, social and governance (ESG) and higher risk factor ETFs have been popular in 2020. In a thematic ETF article on Aug. 10 titled, “Are the S&P’s Top 5 Stocks Part of ESG ETFs?”, we highlighted the growing trend toward ESG thematic ETFs.

These values-oriented funds have remained popular into early September. The iShares ESG Aware MSCI USA ETF (ESGU) gathered $6.2 billion of new money thus far in 2020, while the Vanguard ESG U.S. Stock ETF (ESGV) and the Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG) gathered $855 million and $708 million year to date, respectively, through Sept. 8.

 

Single-Factor ETFs

In addition, some more narrowly focused single-factor ETFs gathered significant new money this year. For example, MTUM had approximately $800 million of net inflows, likely aided by its 13% gain and exposure to higher-growth information technology (32% of assets) and health care (29%) stocks.

Yet VLUE pulled in approximately $2.9 billion, despite a disappointing 16% decline in performance. That ETF is more diversified at the sector level than MTUM, with 24% in information technology and 13% in health care, through stocks like Intel (INTC) and CVS Health (CVS) provide the exposure, not recent strong performers such as Apple (AAPL) and Tesla (TSLA).

 

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

 

VLUE was not the only popular alternatively weighted ETF that has incurred performance losses in 2020. The SPDR Portfolio S&P 500 High Dividend ETF (SPYD) added nearly $500 million in new assets this year, despite plummeting 26% in value. Fellow dividend ETFs iShares Core Dividend Growth ETF (DGRO) and Schwab US Dividend ETF (SCHD) gathered approximately $1.8 billion and $1.2 billion of net inflows, respectively, despite modest 3.8% and 1.6% losses.  

 

Largest Inflows Among US Dividend & Fundamental And Factor & Thematic Index ETFs

Fund Ticker Assets ($B)  YTD Flows ($B) YTD Return (%)
iShares ESG MSCI USA ESGU 8.5 6.2 6.8
iShares Edge MSCI USA Value Factor VLUE 6.9 2.9 -16
iShares Edge MSCI USA Quality Factor QUAL 19 2.2 2.9
iShares Core Dividend Growth  DGRO 12 1.8 -3.8
Schwab US Dividend SCHW 12 1.2 -1.6
Vanguard ESG US Stock ESGV 1.9 0.9 8.3
iShares Edge MSCI USA Momentum Factor MTUM 11 0.8 13
Xtrackers MSCI USA ESG Leaders Equity USSG 2.5 0.7 4.4
WisdomTree U.S. Quality Dividend Growth DGRW 4 0.7 2
SPDR Portfolio S&P 500 High Dividend SPYD 2 0.5 -26

Source: CFRA’s First Bridge Database, as of 9/8/2020

 

Redemptions

Not all dividend ETFs gathered money despite losses. Indeed, the two largest redemptions among U.S. dividend & fundamental and factor & thematic ETFs were dividend ETFs that had double-digit 2020 losses. SDY and DVY each had $2.0 billion in redemptions, shrinking to $15 billion and $13 billion, respectively. Both have relatively high exposure to financials and utilities stocks.

 

Largest Outflows Among US Dividend & Fundamental And Factor & Thematic Index ETFs

Fund Ticker Assets ($B)  YTD Flows ($B) YTD Return (%)
iShares Select Dividend DVY 13 -2 -19
SPDR S&P Dividend  SDY 15 -2 -11
iShares Edge MSCI Min Vol USA USMV 34 -1.9 -2.4
Invesco S&P 500 Low Volatility  SPLV 8.8 -1.8 -8.1
Invesco FTSE RAFI US 1000  PRF 3.9 -1.1 -7.7
iShares Core High Dividend HDV 5.5 -1.1 -14
Schwab Fundamental U.S. Large Company  FNDX 4.6 -1.1 -6.7
Invesco S&P MidCap Low Volatility XMLV 2 -1 -20
WisdomTree U.S. MidCap Dividend  DON 2.5 -0.7 -21
iShares Edge MSCI USA Size Factor SIZE 0.8 -0.7 -3.3

Source: CFRA’s First Bridge Database, as of 9/8/2020

 

Lower volatility ETFs have been out of favor this year. Even though the market volatility has remained high this year, large funds positioned to protect the downside have lagged and investors have been redeeming shares. The $34 billion USMV and the $8.8 billion SPLV were down 2.4% and 8.1%, respectively, year to date through Sept. 8—trailing the 4.5% return for the Vanguard S&P 500 ETF (VOO). In response, investors pulled $1.9 billion out of USMV and $1.8 billion from SPLV.

Meanwhile, a 20% loss for the Invesco S&P MidCap Low Volatility ETF (XMLV) likely also contributed to investors pulling $1.0 billion from the fund—shrinking its asset base to $2 billion.  

While sentiment matters, CFRA ETF ratings provide an independent forward-looking perspective. Our four- and five-star ratings on MTUM, SPLV and USMV and our one- and two-star ratings on DVY, SDY and SPHD incorporate risk, reward and cost metrics including holdings analysis and a past performance review.

 

Issuer Assets

iShares stands out among top-tier ETF providers. The five largest ETF providers based on overall assets (iShares, Vanguard, State Street Global Advisors, Invesco and Charles Schwab) all provide low cost broad exposure to U.S. equities. Yet these top-five firms also offer a wide range of dividend & fundamental and factor & thematic ETFs collectively comprising $219 billion of assets.

Year to date through Sept. 8, iShares grew the asset base of these products to $119 billion, aided by $10 billion of net inflows. In contrast, Invesco’s $30 billion in assets tied to these subcategories was hurt by $6.2 billion of net outflows.

Among the other top five firms, Vanguard pulled in $1 billion, while State Street Global Advisors incurred $1.9 billion of net redemptions; Schwab’s $225 million of net outflows minimally impacted its $20 billion asset base.

 

Dividend & Fundamental And Factor & Thematic ETF Flows in 2020 ($B)

Source: CFRA’s First Bridge Database, as of 9/8/2020

 

Conclusion

As many U.S. alternatively weighted ETFs have lagged the market-cap-weighted S&P 500 Index in 2020, investors have picked new favorites. In particular, demand for higher risk momentum and value ETFs was much stronger than previously popular lower volatility strategies. In contrast, dividend funds were a mixed bag: Some beaten-up products gathered assets, while others were shunned.

 

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.

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