Daily ETF Watch: A ‘Smart Beta’ Facelift

iShares filed updated regulatory paperwork detailing four ETFs that equally weight four investment factors—quality, value, momentum and size—signaling it now plans to call the upcoming lineup “FactorSelect” to distinguish itself from a growing crowd of “smart beta” ETFs.

Apart from dropping the initial moniker “Multi-Factor,” iShares has assigned tickers and expense ratios to the four proposed strategies, suggesting their launches are near if not imminent. It also replaced the small-cap U.S. and emerging market funds detailed in an initial filing in January, and replaced them with an international small-cap and a global fund.

As noted, the four proposed funds will compete with a growing number of “smart beta” funds already on the market, not least a similar lineup from State Street Global Advisors’ lineup of so-called Quality Mix funds that combine three investment factors—minimum volatility, quality and value. All three factors are considered to be the factors targeted in the investment strategies of Warren Buffett.

The proposed iShares “FactorSelect” ETFs and their annual expense ratios are as follows:

• iShares FactorSelect MSCI USA ETF (LRGF), 0.35 percent, or $35 for each $10,000 invested
• iShares FactorSelect MSCI Intl Small-Cap ETF (ISCF), 0.60 percent
• iShares FactorSelect MSCI International ETF (INTF), 0.45 percent
• iShares FactorSelect MSCI Global ETF (ACWF), 0.50 percent

Side-By-Side Comparisons

The U.S.-focused FactorSelect fund, LGRF, will compete directly with State Street’s SPDR MSCI USA Quality Mix ETF (QUS), but SSgA’s QUS is 20 basis points cheaper than the iShares product. Meanwhile, the SPDR MSCI EAFE Quality Mix ETF (QEFA | C-84) tracks a similar space as the international ETF; both target developed markets and exclude the U.S., but QEFA also excludes Canada.

It appears as though iShares isn’t looking to target the SPDR ETFs in a direct, one-to-one way, but it is looking to develop its own lineup of multifactor ETFs via its own process. SSgA has taken a country and regional approach with more than a dozen Quality Mix ETFs targeting individual countries and regions.

Both are using MSCI indexes, an indication of that indexing firm’s prominent position in the world of enhanced beta funds.

Pacer Outlines Funds
Pacer Financial has outlined plans for its own lineup of in-house ETFs. The firm originally sought exemptive relief last summer, with approval granted this February. Although Pacer has been involved in the marketing of the RevenueShares ETFs and the RBS exchange-traded notes (ETNs), these would be its first in-house ETF products.

Three of the four proposed funds use a “Trendpilot” strategy similar to what RBS uses in its Trendpilot ETNs. The basic premise is that the underlying benchmark switches its allocation between a designated index and three-month Treasury bills based on the 100- or 200-day moving average of the targeted index.

The three Trendpilot funds and their target indexes are as follows:

• Pacer NASDAQ-100 Trendpilot ETF and the Nasdaq-100 – 100-day moving average
• Pacer US 400 Trendpilot ETF and the S&P Midcap 400 – 200-day moving average
• Pacer US 500 Trendpilot ETF and the S&P 500 – 200-day moving average

Meanwhile, the Pacer US Export Leaders ETF is based on one of Pacer’s in-house indexes and tracks an equally weighted index of 100 stocks selected from the S&P 500 and S&P MidCap 400 indexes. The underlying benchmark starts with the 200 stocks with the highest percentage of foreign sales relative to their overall sales and then selects the 100 stocks with the highest free cash flow from that pool, according to the prospectus.

Such export-oriented firms do well in a weakening dollar environment, something that many are expecting to see after the dollar has gone through an extended period of strengthening relative to other global currencies. In fact, WisdomTree just a few days ago put a similar fund into registration that also targets domestic companies with strong export-based revenues.