Daily ETF Watch: New Smart Beta Family

ETF Securities, the fund company known in the U.S. mainly for its physical metals exchange-traded funds, has filed regulatory paperwork this month to branch into equity strategies. But these proposed funds, four so far, are solidly in the “enhanced beta” category, putting the firm at the center of what is perhaps the ETF industry’s hottest current trend.

The four proposed funds are as follows:

• ETFS Zacks Earnings Large-Cap U.S. Index Fund
• ETFS Zacks Earnings Small-Cap U.S. Index Fund
• ETFS Multi Factor U.S. Large-Cap Index Fund
• ETFS Multi Factor Europe Developed Index Fund

As the names of the funds suggest, each will have “tilts.”

These kinds of quasi-active enhanced-beta indexes have become increasingly popular among investors, and fund sponsors appear quite keen on seeking to exploit this appetite. Using the most liberal definition of what constitutes “smart beta,” the total assets in such funds now amount to about $380 billion, or about 20 percent of the $1.815 trillion now invested in U.S.-listed ETFs.

ETF Securities has a total of seven ETFs listed in the U.S., all of them precious metals funds. It's total assets under management are now  at $2.7 billion.

The preliminary prospectus didn’t include tickers or proposed annual expense ratios.

Earnings Screens

In the case of the “Earnings” moniker in the first two proposed funds, that means they will use index screens developed by the Chicago-based financial research firm Zacks that seek to isolate and emphasize companies with solid earnings. Specifically, the funds will use the Zacks Rank factor and Zacks Quality factor.

The Zacks Rank factor focuses on sell-side analysts’ revised earnings estimates to extract stock price movement-related information. The Zacks Quality factor focuses on earnings quality information and favors companies with higher cash earnings and lower accruals.

Multi Factor Screens

The “Multi Factor” nomenclature in the second pair refers to an index screen also developed by Zacks.

The index is composed of four subindexes, each of which represents a specific beta exposure or factor tilt. Those are high valuation, high momentum, low volatility and size.

Each subindex comprises the top 50 percent of companies from the prescreening universe that best represent that subindex’s specific beta exposure, except that the “size” subindex comprises the bottom 50 percent of companies in the prescreening universe according to free-float market capitalization.

Each subindex then applies a combination of five equally weighted popular diversification-based weighting strategies to maximize diversification within the subindex and limit the risks inherent with each of the five diversification strategies. Each subindex is given an equal importance or weight in the index. The index is reconstituted and rebalanced quarterly.