Daily ETF Watch: Factor Battle Brewing

February 06, 2015

 

iShares is gearing up to take on State Street Global Advisors, firing a second volley at one of its biggest competitors with its latest round of filings.

 

State Street entered the factor-based ETF party a little late, but was pretty aggressive when it finally did. The ETF provider rolled out a dozen SPDRs based on MSCI’s international “Quality Mix” indexes within the space of about three months in mid-2014. The funds included nine single-country ETFs and three regional ETFs.

 

They appeared to be staking out the international factor space, while iShares took a more scattered approach, launching a handful of minimum-volatility ETFs in 2011 and then focusing on single-factor U.S. funds in 2014. Most notably, four of those domestic funds were seeded with $100 million each by the Arizona State Retirement System, which uses the funds to achieve factor tilts within its equity allocation.

 

In January, it rolled out two developed-market ex-U.S. funds targeting the momentum and quality factors. In all, iShares has 13 ETFs currently trading that are based on factor indexes from MSCI.

 

However, at around the same time it was rolling out those two funds, iShares also filed for four multifactor ETFs:

 

·         iShares MSCI USA Multi-Factor ETF 

·         iShares MSCI USA Small-Cap Multi-Factor ETF

·         iShares MSCI Global Multi-Factor ETF 

·        iShares MSCI Emerging Multi-Factor ETF 

 

Most recently, it has filed for two more “Multi-Factor” ETFs, the iShares MSCI International Multi-Factor ETF and the iShares MSCI International Small-Cap Multi-Factor ETF, both of which will cover different segments of the non-U.S. developed markets.

 

MSCI’s “Multi-Factor” methodology targets the value, quality, momentum and size factors, while the “Quality Mix” methodology—which MSCI has put forth as being similar to the active approach to investing used by Warren Buffett—targets the value, quality and minimum volatility factors.

 

Of the entire batch of new filings from iShares, the international fund would be in competition with the SPDR MSCI EAFE Quality Mix ETF (QEFA | C-77) and the SPDR MSCI World Quality Mix ETF (QWLD | C-76), while the emerging market ETF would compete with the SPDR MSCI Emerging Markets Quality Mix ETF (QEMM | F-83). Should the funds have comparable expense ratios, the decision for most investors will come down to which factors each fund family captures.

 

The filings did not include expense ratios, tickers or exchange listings.

 

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