Todd Rosenbluth is director of ETF and mutual fund research at CFRA.
As the nonmarket-cap-weighted ETF universe continues to expand, investors have an increasingly large array of choices to consider, depending whether they think we’re in a risk-on or a risk-off environment.
Yet even in similar-sounding portfolios, the devil remains in the details—making it important for investors to understand what’s inside.
While not all dividend-paying stocks incur low volatility and not all low-vol stocks pay a hefty dividend, these two factor attributes complement each other well.
Similar Goals, Different Exposures
Investors in the $2.6 billion PowerShares S&P 500 High Dividend Low Volatility (SPHD) and the $593 million Legg Mason Low Volatility High Dividend ETF (LVHD) have portfolios that earn favorably low-risk considerations, according to CFRA Research. Both have hefty weights in the risk-off utility sector; but when one looks closely at what is inside, much is very different.
SPHD recently had a 20% stake in the real estate sector, higher than the 9% stake in LVHD, with HCP and Iron Mountain among SPHD’s top 10 holdings.
Meanwhile, LVHD had higher weightings in consumer discretionary (12% vs. 6% for SPHD) and information technology (12% vs. 7%), with Cisco Systems and Intel among LVHD’s larger positions.
In contrast, USAA MSCI USA Value Momentum Blend Index ETF (ULVM) focuses on companies that score well based on more economically-sensitive value and momentum characteristics.
The $205 million ETF launched in October 2017 and earns a CFRA Marketweight due in part to its holdings. The ETF is rebalanced on a quarterly basis, most recently in February, and has its largest sector exposure in financials (17% of assets), consumer discretionary (16%) and technology (14%). Recent additions include Target and T. Rowe Price.
A smaller $3 million PowerShares S&P 500 Value With Momentum Portfolio (SPVM) also uses value and momentum traits, but follows a two-step screening process. Financials (45% of assets), including Lincoln National and Prudential Financial, are highly represented.
Meanwhile, the Oppenheimer Russell 1000 Dynamic Multifactor (OMFL) uses five factors—momentum, value, quality, size and low volatility—but employs a dynamic approach that looks at leading economic indicators and market sentiment to determine the exposure.
David Mazza, head of ETF Investment Strategy for Oppenheimer Funds, told CFRA that in late 2017, OMFL had been tilted toward low volatility and quality due to a potential economic slowdown. However, in January, amid signs of economic expansion, the fund tilted toward value, momentum and small size. To watch a CFRA interview with Mazza, check out https://newpublic.cfraresearch.com/oppenheimer-2/.
Technology (18% of assets), financials (17%) and consumer discretionary (16%) stocks were widely held in OMFL, including CFRA buy recommendations HP Inc. and Western Digital.
A second dynamic multifactor ETF, the PIMCO RAFI Dynamic Multi-Factor U.S. Equity ETF (MFUS), was favoring momentum and quality over other factors at the end of February. MFUS had a 20% stake in technology, but just a 10% in financials.
Just as it is common for two actively managed funds to disagree on the market environment and how to best to benefit from it, dynamic ETFs can be distinctly positioned.
CFRA agrees with Oppenheimer’s Mazza, who said in the video that investors need to know what they own by looking more at the holdings than the backtest of an ETF. Not only do similar-sounding ETFs often provide different sector exposures, but the stakes are likely to change through the reconstitution process.
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 on Twitter @ToddCFRA.