ETF Watch: 10 Funds Launch

So much for a lazy summer—the ETF industry is roaring along, with 26 launches in June, and July looking to be just as busy. Today alone, 10 more ETFs from four different issuers are rolling out to investors.

iShares Debuts 4 Funds On 2 Exchanges
iShares is leading the pack, with four ETFs being introduced—two yield-focused bond funds listing on the Bats exchange and two environmental, social responsibility and governance (ESG) bond funds listing on the Nasdaq. Bats is owned by ETF.com’s parent company, CBOE.

The two funds launching on the Nasdaq include the iShares ESG 1-5 Year USD Corporate Bond ETF (SUSB) and iShares ESG USD Corporate Bond ETF (SUSC). SUSB, which covers investment-grade corporate debt securities with maturities between one to five years, comes with an expense ratio of 0.12%, while SUSC charges 0.18%.

The former is basically a subset of the latter. SUSB tracks an index derived from the Bloomberg Barclays US Corporate 1-5 Years Index, while SUSC’s benchmark is derived from the broader Bloomberg Barclays US Corporate Index. SUSB’s index includes 543 issues drawn from 20 countries, while SUSC’s index covers 2,297 issues drawn from 24 countries.

ESG Approach

“These new products are the first exposures of their kind in an ETF wrapper, and complement iShares’ existing ESG suite,” said Martin Small, U.S. head of iShares, in reference to the funds.

Both ETFs’ indexes rely on methodologies that evaluate companies for their positive traits relating to ESG, while still seeking to preserve the risk and return metrics of the parent index.  The approach first screens out companies that are involved in the tobacco and “controversial” weapons industries as well as companies that are affected by business controversies that MSCI deems “severe.”

From there, the methodology evaluates each remaining company based on key ESG issues, on how those issues represent potential costs or opportunities for the firm and on how the firm responds to those costs and opportunities.

Companies are evaluated relative to their industry peer groups and with regard their geographic risk. Ultimately, they are assigned a score that takes into account how a firm performs on each key issue, and those scores are used in determining weightings, the prospectus said.  

Yield-Focused Bond Funds
The two smart-beta bond funds launching on Bats include the iShares Edge High Yield Defensive Bond ETF (HYDB) and the iShares Edge Investment Grade Enhanced Bond ETF (IGEB). The funds come with expense ratios of 0.35% and 0.18%, respectively. Both target the quality and value factors, a press release noted.

HYDB tracks the BlackRock High Yield Defensive Bond Index, an index of junk bonds with a face amount outstanding of at least $350 million and at least one year of remaining maturity. Component securities must be denominated in U.S. dollars but can be issued by domestic or foreign corporations.

The fund has a significant weighting in industrials companies. The index methodology is designed to screen out securities of the companies most likely to default, and the index is optimized in such a way that is intended to enhanced its returns while limiting risk and turnover, the prospectus said.

IGEB, on the other hand, tracks the BlackRock Investment Grade Enhanced Bond Index, which targets domestic and foreign investment-grade debt denominated in U.S. dollars and having a face amount outstanding of at least $500 million. It is similar to HYDB in its design, favoring the bonds of companies that have a low likelihood of default, weighting them in such a way as to enhance returns and keeping a lid on risk and turnover.

The press release also notes that the two funds are the first to track BlackRock’s own in-house indexes.

MBS Fund Fee Cut

In addition to launching four funds, iShares is drastically cutting the fee for its iShares MBS ETF (MBB). In an effort to make the fund the “tool of choice” for investors looking to access the mortgage market, the firm is lowering MBB’s fee from 0.27% to 0.09%.

“By lowering the price to make the fund competitive with direct investment in mortgage securities, institutions will have a much more efficient, liquid option for dynamically managing mortgage-backed exposures,” said Small.

MBB first launched in 2007 and has more than $10 billion in assets under management. It is the largest fund in the space, and the move by iShares will turn it into the second-cheapest fund as well. The $4.1 billion Vanguard Mortgage-Backed Securities ETF (VMBS) has an expense ratio of 0.07%.

Legg Mason Adds Small-Cap Fund
Legg Mason is rolling out the first small-cap fund in its lineup. The Legg Mason Small-Cap Quality Value ETF (SQLV) is launching on the Nasdaq and comes with an expense ratio of 0.60%.

The fund showcases Legg Mason’s reliance on the expertise of its affiliates to create differentiated ETFs. Small-cap manager Royce & Associates is serving as the subadvisor to SQLV, having distilled the key features of its quantitative approach to the small-cap space into an index. 

“The strength of Legg is the strength of its specialty investment affiliates. You want to think of it less as an operating company and more as a company that benefits from these investment boutiques in different asset classes,” said Steve Lipper, Royce chief investment strategist and managing director.

Legg Mason offers the wrapper, and its affiliates bring their intellectual capital to the table, he noted.

'Negative Factors'

SQLV targets the quality and value factors in addition to exploiting the small-size factor and actively seeking to reduce exposure to leverage and short-term momentum, both of which Lipper deems “negative factors.”

The methodology scores companies based on those positive and negative factors, with the momentum score used to determine the timing of a stocks’s addition to or deletion from the index. Weightings are determined by company fundamentals including book value, revenue, free cash flow and dividends paid, the prospectus said.  

To maintain diversification, individual securities are capped at 3% of the index, while sectors are capped at 25%. The fund is rebalanced and reconstituted on a quarterly basis, according to the document.

“We’re trying to find companies that are in that intersection of quality and value. And the opportunity that we have is because small-caps are so lightly covered by Wall Street compared to large-caps. You have the opportunity to find companies that are mispriced,” Lipper said. He adds that SQLV's index reflects the principles under which Royce operates.

Lipper says SQLV represents the only multifactor small-cap ETF from a small-cap specialist.

OppenheimerFunds Debuts More Revenue Funds
OppenheimerFunds has launched its own ESG ETFs and recently filed for multifactor funds, but today it’s adding three funds to its core lineup of revenue-weighted ETFs. The three funds include one offering global exposure and two that separate out developed and emerging markets.

The funds list on the Bats exchange, and their names, tickers and expense ratios are as follows:

• Oppenheimer Emerging Markets Revenue ETF (REEM), 0.46%
• Oppenheimer Global Revenue ETF (RGLB), 0.43%
• Oppenheimer International Revenue ETF (REFA), 0.42%

While REEM tracks a revenue-weighted version of the MSCI Emerging Markets Index, RGLB’s benchmark is derived from the MSCI ACWI and REFA’s is derived from the MSCI EAFE Index. The three funds add an international dimension to Oppenheimer’s domestic lineup of revenue-weighted smart-beta funds.

PowerShares Launches Large-Cap Smart-Beta Funds
Invesco PowerShares’ two latest launches track indexes derived from two of the most popular U.S. large-cap indexes. The PowerShares S&P 500 Minimum Variance Portfolio (SPMV) tracks an index that applies a minimum variance strategy to the S&P 500 Index, while the PowerShares Russell 1000 Enhanced Equal Weight Portfolio (USEQ) tracks an index that screens the Russell 1000 for value and momentum stocks.

Both funds list on the Bats exchange. SPMV carries an expense ratio of 0.13%, while USEQ has an expense ratio of 0.29%.

SPMV’s index relies on a managed volatility methodology intended to result in a lower volatility level than that of the S&P 500.

Meanwhile, USEQ’s underlying index essentially scores the components of the Russell 1000 for the value and momentum factors, and excludes any stocks falling in the bottom 10% for either of those factors. It also excludes stocks with zero or negative earnings during the prior 12-month period. The stocks that remain in the index are then equally weighted, the prospectus said.

Contact Heather Bell at [email protected].