iShares Grows Factor Style ETF Family

April 16, 2020

Today, iShares launched a trio of ETFs that are designed to offer investors a multifactor take on U.S. markets. The new funds and their expense ratios are as follows:

All three funds list on Cboe Global Markets, the parent company of ETF.com.

 

Methodology

The new ETFs all have the same basic methodology, with STLC tracking a subset of the Russell 1000, STMB tracking a subset of the Russell Midcap Index and STSB tracking a subset of the Russell 2000. Each fund targets the momentum, quality, value, size and low volatility factors, undergoing a monthly optimization to maximize exposure to each of the factors and keep risk levels similar to those of their parent indexes, according to the prospectus.

These funds are part of the same family as the $6 million iShares Factors US Value Style ETF (STLV) and the $4 million iShares Factors U.S. Growth Style ETF (STLG), which launched earlier this year. Those funds are derived from the Russell 1000 Growth and Value indexes and implement the same five factors in their methodologies.

The underlying indexes for the entire suite were developed by the Factor-Based Strategies group under Andrew Ang at BlackRock, according to a press release.

Purpose

According to Holly Framsted, BlackRock’s U.S. head of factor ETFs, most investors still use the Morningstar style boxes when building portfolios, but most multifactor ETFs don’t fit neatly into that framework.

“These products will fill out a suite of style-box-oriented multifactor products for us which are specifically designed to have tracking error constraints around well-known style box benchmarks,” she said.

However, BlackRock has an existing lineup of multifactor ETFs (beyond STLV and STLG) that includes the $732 million iShares Edge MSCI Multifactor U.S.A. ETF (LRGF) and targets the same factors with the exception of low volatility.

“I think our existing multifactor products as well as these new style-box-constrained multifactor products are incredibly complementary. In fact, in many ways they are solving different challenges for clients within the portfolio. The original suite of multifactor products are designed to outperform the market broadly,” Framsted noted.

She points out that a fund like LRGF features concentrated exposure to rewarded factors, which comes with a higher level of tracking error.

“The inclusion of minimum volatility in these new products, which are style box constrained, gives us another mechanism for fine-tuning risk and keeping it more closely aligned with the stated benchmark these funds are designed to track,” Framsted added.

One of the biggest criticisms of factor strategies is that they can introduce additional risks that investors may not be aware of. This latest lineup from iShares clearly seeks to address that concern.

Contact Heather Bell at [email protected]

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