How Factors Can Skew ETF Exposure

August 10, 2017

From a sector perspective, financials (31% vs. 22%) and technology (10% vs. 6%) stocks are well-represented. IMTM has $35 million in AUM and a 0.30% net expense ratio, compared with IDEV’s $66 million in AUM and its expense ratio of 0.07%.

IMTM’s 18.0% year-to-date return through July was slightly ahead of EFA’s 17.8% gain, and is almost as strong as the 22% gain for the U.S. version: the iShares Edge MSCI USA Momentum Factor ETF (MTUM), which has $3.5 billion in AUM and a 0.15% expense ratio. Unlike EFA, IMTM and IDEV have exposure to Canadian stocks.


Title Toward Eurozone Markets

Source: CFRA’s MarketScope Advisor, June 2017


The Multifactor Effect

Investors are increasingly looking to ETFs that combine factors such as low volatility and momentum with size, quality and/or value, diversifying away some of the dependence on a one- screen attribute. Yet an understanding of how the sector/country exposures compare to a market-cap-weighted approach is important.

For example, the JPMorgan Diversified Return Emerging Markets Equity ETF (JPEM) screens stocks within the FTSE Emerging Markets Index based on value, quality and momentum factors, and combines region and sector weighting process focused on low volatility.

Relative to the Vanguard FTSE Emerging Markets ETF (VWO), JPEM recently had more exposure to the smaller emerging markets, such as Indonesia (6% vs. 3%) and Malaysia (6% vs. 4%). Stakes in larger markets such China (21% vs. 29%) and India (8% vs. 12%) are more moderate. VWO has $60 billion in AUM with a 0.14% expense ratio, and JPEM has $160 million in AUM and a 0.51% expense ratio.

Meanwhile, the Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (DEMG)—with $13 million in AUM and a 0.50% expense ratio—scores stocks within the same parent FTSE index as JPEM based on their combined value, quality and momentum attributes, as well as size and low volatility factors. As a result, DEMG has more asset exposure to South Africa (13% vs. 8% for VWO and 6% for JPEM) and less exposure to China (16%).

VWO’s 21% gain in the first seven months of 2017 was stronger than the 19% and 16% for JPEM and DEMG, respectively.

Of course, past performance is not indicative of future results, and CFRA thinks investors need to do their homework to understand the exposure differences. Our reports incorporate holdings-level analysis and ETF attributes, including expense ratio and trading costs.

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him at @ToddCFRA.


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