ETF Watch: WisdomTree Lists Multifactor Fund

Meanwhile, Goldman Sachs adds a small-cap U.S. ETF to its ActiveBeta lineup.

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Reviewed by: etf.com Staff
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Edited by: etf.com Staff

Today WisdomTree and Goldman Sachs are both rolling out smart-beta multifactor ETFs. For WisdomTree, the move is a first, while Goldman is rounding out its ActiveBeta family with a small-cap domestic offering.

WisdomTree Goes Multifactor

WisdomTree is jumping on the multifactor ETF trend with the launch of its latest ETF. The underlying index of the WisdomTree U.S. Multifactor Fund (USMF) targets a combination of fundamental and technical factors by focusing on the value, quality, momentum and correlation factors. It weights its components inversely by volatility.

USMF comes with an expense ratio of 0.28% and lists on the Bats exchange, which is owned by ETF.com’s parent company, CBOE.

The fund represents a significant change of direction for WisdomTree.

“One of the key differentiators is that those original strategies are done very close to tracking the market, with low tracking error, a very beta-like exposure by tilting toward the factors that we believe will lead to better performance over time,” said Jeremy Schwartz, WisdomTree’s director of research.

“Where we went in our new multifactor strategy is really thinking about it from an alpha orientation, and trying to add value, but then constraining the tilt in a way so that you’re really tapping into the factors more so than making a specific sector bet,” he added. “It’s designed to use the academic research of what factors have worked over long periods of time, get unique exposure to that in a diversified setting, but really go more for an alpha signal and try to add more value, which means you have more tracking error versus the market.”

A Narrower Underlying Index

According to the prospectus, the fund’s underlying index starts with the largest 800 U.S.-listed companies that are incorporated and headquartered in the U.S. and that have an average three-month daily trading volume of at least $1 million. From there, the methodology scores them based on the four targeted factors, selecting the 200 highest-scoring securities.

Schwartz notes that the 200-stock portfolio is far more concentrated than that of earlier WisdomTree funds, some of which have components numbering in the thousands. USMF takes on more active stock selection risk, he says.

“It definitely goes far more away from beta in pursuit of diversified alpha drivers,” Schwartz commented.

Companies are weighted based on their factor scores and their 12-month inverse volatility, with each afforded equal importance. Reconstitutions and rebalancings occur quarterly, at which time individual security weightings are capped at 4%, and sector weights are set equal to the sector weightings of the original 800 stocks in the selection universe, the prospectus said.

In particular, the correlation factor exposure is somewhat unusual, though Schwartz says it has been coming up more and is related to the low-volatility phenomenon.

“You’re getting diversification in terms of what your overall exposure to the market is by selecting the least correlated stocks,” he said.

 

 

Goldman Adds US Small-Cap Fund
Today Goldman Sachs is rolling out the Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF (GSSC), the sixth addition to its multifactor lineup.

GSSC lists on the NYSE Arca and comes with an expense ratio of 0.20%.

The firm launched the first multifactor ETF in its ActiveBeta family back in September 2015. The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) currently has $2.3 billion in assets under management (AUM) and comes with a rock-bottom (for smart beta) expense ratio of 0.09%.

Since then, Goldman has built out its international offering in the family, adding funds targeting developed markets and emerging markets as well as funds that cover Japan and Europe. Goldman says it has launched its funds based on consumer demand, a successful strategy given that the five-fund family has more than $4 billion in total AUM.

“What has heavily influenced our launch sequencing was really client demand, and in some cases explicit demand,” said Matthew Grand, chief operating officer of Goldman’s ETF operations. He notes that while client demand was not as great for a small-cap domestic fund, GSSC was in the plans all along.

GSSC tracks an index that is derived from the Russell 2000 Index and that, like the other ActiveBeta ETFs, targets the value, momentum, quality and low-volatility factors. Essentially, the methodology creates four subindexes focused on each factor and then combines and equally weights them within a broader index, according to the prospectus.

Contact Heather Bell at [email protected].

 

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