O’Shares ETFs, the issuer founded by The Shark Tank’s Kevin O’Leary, has filed for five ETFs that rely on a quality growth smart-beta strategy, a departure from the quality dividend approach that its lineup has focused on. The five proposed ETFs include the following:
- O'Shares U.S. Large Cap Quality Growth ETF
- O'Shares U.S. Small Cap Quality Growth ETF
- O'Shares Global Internet Giants ETF
- O'Shares Robotics Quality Growth ETF
- O'Shares Artificial Intelligence Growth ETF
The two U.S. funds come with an expense ratio of 0.48%, while the three thematic ETFs charge 0.68%. All are set to list on the NYSE Arca.
Smart-Beta Thematic ETFs
While the quality growth approach is a definite departure for O’Shares, the thematic ETFs represent a largely uncharted area in ETFs. John Hancock launched multifactor sector funds, but O’Shares appears to be at the vanguard of multifactor thematic ETFs.
The “Internet Giants” ETF will focus on companies operating in the internet technology and internet commerce spaces, drawing components from the technology hardware, storage and peripherals, internet software and services, software, IT services, and internet and direct marketing retail industries.
The index selects its components from a universe of 2,500 global stocks. Those chosen must exhibit quality and growth characteristics, with quality determined by the monthly rate at which the company spends shareholder capital and companies that have too high of a spending rate excluded from consideration. Meanwhile, the growth factor is defined by revenue growth and the price-to-sales ratio relative to revenue growth, with companies scored on both of those metrics.
Companies in the index are weighted by a combination of modified market capitalization and growth scores. The index is rebalanced every quarter and reconstituted twice a year, according to the prospectus.
The robotics fund is designed along the same lines, with the exception that it selects its stocks from companies involved in the robotics industry in the areas of design, construction, operation, application and automation.
With the “Artificial Intelligence” fund, companies chosen for the index represent business activities related to the AI areas of visual perception or navigation; pattern recognition for identification; pattern recognition for prediction; strategy optimization or modeling; speech recognition; natural language translation or generation; and physical coordination. However, both the robotics and AI fund measure growth solely based on revenue growth, the prospectus says.
The U.S. large-cap index covers the largest 500 stocks in the U.S. based on market capitalization, while the small-cap ETF selects its stocks from the 2,500 companies that fall below the largest 500 U.S. companies in terms of market capitalization.
For these two funds, the quality factor is measured using profitability, leverage and cash flow yield. The growth factor is measured by earnings and revenue growth. Stocks are scored on both the quality and growth factors, and the scores are combined to determine rankings. The stocks with the highest rankings in their respective sectors are included in the index. Weightings are determined by a combination of market capitalization and quality/growth scores.
Quality and growth factors are not typically combined in the smart-beta space, but could appeal to certain investors looking to temper their growth exposure with a feature that screens out low-quality companies and potentially blunts the risk associated with growth strategies.
Contact Heather Bell at [email protected]