How Factors Can Skew ETF Exposure

August 10, 2017

Todd Rosenbluth is director of ETF and mutual fund research at CFRA.

In the first seven months of 2017, investors favored well-diversified U.S. equity and international equity ETFs. CFRA sees continued growth of these well-established, low-cost products as a sign that ETF adoption is still in the early stages.

Indeed, the iShares MSCI EAFE ETF (EFA) gathered $9.5 billion in assets under management (AUM) so far this year, while the Vanguard FTSE Emerging Markets (VWO) and the iShares Core S&P Mid-Cap ETF (IJH) pulled in $6.1 billion and $2.7 billion, respectively, according to data.

As investors gain greater comfort in using ETFs for their asset allocation needs, we think newer products that slice the market based on factors such as low volatility, quality or momentum will be appealing.

These ETFs are structured based on tools active managers have used for years. Yet due diligence is a key to understanding the exposure these products provide relative to the market-cap-weighted alternatives.

Low-Vol Midcaps Skew To Defensive Sectors

The PowerShares S&P MidCap Low Volatility Portfolio (XMLV) is a good example. The ETF focuses on 80 stocks with the lowest volatility in the midcap S&P 400 Index, without a focus on sector representation.

Relative to IJH, XMLV recently had significantly higher asset exposure to real estate (21% vs. 10%) and utilities (17% vs. 6%), and much lower exposure to information technology (6% vs.18%) and health care (4% vs. 9%). Other large weightings for XMLV are financials (19%) and industrials (12%).


Source: CFRA’s MarketScope Advisor, June 2017


XMLV had been a strong performer in 2017, rising 8.3% through July 31, ahead of the 6.9% for IJH. Some of the better-performing stocks in XMLV include insurers American Financial Group and Everest Re Group. XMLV has $1.1 billion in AUM and a 0.25% net expense ratio.

How Momentum Impacts Int’l Exposure

In contrast to the lower-risk XMLV, the iShares Edge MSCI International Momentum Factor ETF (IMTM) focuses on developed international stocks with the highest relative price momentum.

Relative to the iShares Core MSCI International Developed Markets ETF (IDEV) that tracks IMTM’s parent index, IMTM recently had more asset exposure to France (15% vs. 9%) and Germany (11% vs. 8%), and a lower stake in Japan (13% vs. 22%) and the U.K. (13% vs. 16%).


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