Old-School Smart Beta ETFs Worth A Look

June 07, 2017

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

Every year, a crop of new “gourmet” restaurants open with fanfare, but only some of them have the staying power to survive five years or longer. Similarly, ETFs regularly come to market and seek to offer a better alternative to the entrenched securities in client portfolios.

While CFRA Research thinks age should not matter when choosing an ETF, ranking approximately 400 equity products that launched since May 2014, there are many earlier-generation, smart-beta ETFs worthy of investor attention.

Later this week, CFRA will be speaking on an ETF due diligence panel at the Inside Smart Beta conference.

Multifaceted Approaches

We consider smart-beta ETFs to be those index-based products that are constructed differently than market-cap-weighted offerings, such as the SPDR S&P 500 Index (SPY) and the iShares Russell 1000 (IWB).

In recent years, the approaches have become multifaceted, with securities inside the ETF needing to meet multiple criteria including dividends, low volatility, momentum, quality, size and value.

These include the Deutsche x-Trackers Russell 2000 Comprehensive Factor (DESC) and the Legg Mason International Low Volatility High Dividend (LVHI) from the 2016 class. Meanwhile, in May 2017, the IQ Chaikin US Small Cap (CSML) came to market based a 20-factor quantitative model that combines fundamental, earnings, technical and sentiment components.

To us, these are the next generation of smart-beta ETFs, which piggyback on the popularity of some single-factor products.

These include the momentum-focused First Trust Dorsey Wright Focus 5 ETF (FV) and low-volatility offerings of the iShares USA Minimum Volatility (USMV) and the PowerShares S&P 500 Low Volatility (SPLV). Launching between 2011 and 2014, the trio quickly gathered more than $1 billion each in assets, but have also periodically moved out of favor somewhat with investors when sentiment toward the targeted factor eroded.


Sample Smart-Beta ETFs: New School vs. Old School

Ticker Year Assets ($M) Expense Ratio
CSML 2017 67 0.35%
DESC 2016 5 0.30%
LVHI 2016 20 0.41%
FV 2014 2,490 0.89%
USMV 2011 13,368 0.15%
SPLV 2011 6,929 0.25%
RWL 2008 675 0.39%
DLN 2006 1,950 0.28%
PRF 2005 4,915 0.39%
RSP 2003 13,493 0.40%



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