Daily ETF Watch: ETFS Adds To Equity Lineup

ETF Securities expanded its budding lineup of equity-based ETFs last week with the launch of two more smart-beta ETFs on Jan. 28. The firm has primarily been known for its futures-based and physical commodity funds, but it launched its first two equity funds earlier in January.

Those funds, the ETFS Zacks Earnings Large-Cap U.S. Fund (ZLRG) and the ETFS Zacks Earnings Small-Cap U.S. Fund (ZSML), rolled out on Jan. 20 and cover the domestic market via earnings-focused indexes from Zacks Research.

In contrast, the two newest funds that launched last Wednesday use a multi-factor approach rather than an approach based primarily on earnings; they also track indexes from the Scientific Beta arm of the Edhec Risk Institute and cover the U.S. and European markets.

The ETFS Diversified-Factor U.S. Large Cap Index Fund (SBUS) and the ETFS Diversified Factor Developed Europe Index Fund (SBEU) are both tied to benchmarks comprising four different factor indexes targeting high valuation, high momentum, low volatility and size, respectively, the prospectus said.

Those factor-based subindexes are each given an equal weighting (25 percent) in the main benchmark, and each uses five different weighting strategies to maximize diversification. The weighting strategies are: maximum deconcentration, maximum decorrelation, efficient minimum volatility, efficient maximum Sharpe ratio and diversified risk weighted.

The U.S. subindexes draw their components from a selection pool of up to 500 companies that are initially chosen for their large size and liquidity, while the European subindexes draw their components from a pool of up to 700 companies from 16 developed European countries.

Unusual Complexity

It’s safe to say that there probably isn’t another smart-beta index methodology that matches the Scientific Beta diversified-factor approach in terms of complexity. ETF Securities noted in a press release that the index provider’s goal is to construct smart-beta approaches that reduce exposure to “non-performing market factors” and increase diversification, two of the main problems it sees in traditional, cap-weighted indexes.

SBUS will be competing with several well-established smart-beta ETFs tracking the large-cap U.S. market, including the Guggenheim S&P 500 Equal Weight ETF (RSP | A-81), with $10.5 billion in assets under management; the PowerShares S&P 500 Low Volatility ETF (SPLV | A-47), with $5.5 billion in AUM; and the PowerShares FTSE RAFI US 1000 ETF (PRF | A-88), with $4.3 billion in AUM. None relies on market-cap weighting, but all have methodologies that are much simpler than SBUS’ underlying benchmark.

The choices in terms of smart-beta funds covering Europe’s developed markets are more limited. The most notable competitor for SBEU is the WisdomTree Europe Hedged Equity ETF (HEDJ | B-50), which selects its components based on their dividends and whether or not they derive more than half of their sales from exports. The components selected for the index are weighted by cash dividends paid, and a currency hedge is also applied to the portfolio.

The new funds are listed on the NYSE Stock exchange, and each comes with an expense ratio of 0.40 percent.

Virtus Buys ETFis

Virtus Investment Partners Inc. announced on Jan. 26 that it had agreed to acquire ETF Issuer Solutions, otherwise known as ETFis.

The acquisition is just the latest in a recent wave in the ETF industry, with Janus buying VelocityShares and New York Life acquiring IndexIQ. The larger firms appear to be seeking footholds in the ETF market by acquiring small but established ETF issuers that have the necessary exemptive relief.

However, unlike IndexIQ and VelocityShares, ETFis is a relative newcomer in the ETF arena. It was founded in 2012 and only started launching funds last year; it currently has just five listed products, with less than $50 million in assets under management. Its press release noted it also had another seven ETFs in registration.

That said, having the exemptive relief is an instant entre to launching an ETF for any firm, and buying an ETF issuer with an already-approved application has the potential to jump-start the launch process for latecomers looking to catch up with their more established rivals.

The press release indicated that ETFis would, as a Virtus affiliate, continue to launch products from various subadvisors while taking advantage of its parent company’s distribution capabilities. Indeed, the announcement said that ETFis would be launching the Newfleet Multi-Sector Unconstrained Bond ETF, which is to be subadvised by another Virtus affiliate, Newfleet Asset Management.

The Newfleet fund will be an actively managed fixed-income fund that will be able to invest in a wide range of investment-grade and high-yield debt securities of any maturity, according to its recently filed prospectus.

The press release said that the acquisition was slated to be finalized in March, but did not include the terms of the transaction.