Added Value Unclear
Aided by these lower-cost ETF holdings, both BAPCX and BAPHX have below-average expense ratios relative to their Lipper target-date peer groups, consisting primarily of mutual funds that hold individual stocks/bonds or other mutual funds. CFRA thinks the track records for the BlackRock funds under the current strategy are too short to assess whether the portfolio changes have added value.
Meanwhile, PowerShares launched a suite of asset allocation ETFs in February based on a targeted exposure to equities and fixed income, using PowerShares low-volatility ETFs as well as other PowerShares fundamentally constructed ETFs. Asset allocation is handled by Invesco.
For example, the PowerShares Growth Multi-Asset Allocation Portfolio (PSMG) targets 80% exposure to equities and has 19% combined in the PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the PowerShares S&P International Developed Low Volatility ETF (IDLV). Meanwhile, the PowerShares Moderately Conservative Multi-Asset Allocation Portfolio (PSMM NR) targets 40% equity exposure and has a 7% stake in SPLV, but no exposure to IDLV.
The largest equity ETF holding for PSMG and PSMM is the PowerShares FTSE RAFI US 1000 Portfolio (PRF), which focuses on stocks with dividend and certain value attributes. PSMM and PSMG have expense ratios of 0.38% and 0.39%, respectively.
Equity Smart Beta Exposure in PowerShares Allocation ETFs
Source: PowerShares, May 9, 2017
According to Nick Kalivas, PowerShares senior equity product strategist, blending in low-volatility products with PRF provides the ETFs with risk-managed diversification.
Frank Nielsen, managing director of quantitative research for Fidelity’s Strategic Advisers (SAI), concurs that there are diversification benefits to combining factors. Most factor returns generally are not highly correlated with one another.
In mid-2016, Fidelity SAI began offering managed accounts using passive strategies as building blocks. Examples of these include mutual funds Fidelity SAI US Minimum Volatility Index Fund (FSUVX) and Fidelity SAI US Quality Index Fund (FUQIX), which are not open to new investors. These are built differently than the recently launched and more accessible Fidelity Low Volatility Factor ETF (FDLO) and the Fidelity Quality Factor ETF (FQAL).
According to Nielsen, when comparing index-based products, it is important to understand how the indices are constructed, e.g., what is the universe of securities; what is the definition of the factors; what is the index construction methodology, and how does that impact the sector exposure and index performance.