PIMCO Launches Dynamic Factor Funds

PIMCO is breaking new ground today in the smart-beta space with the launch of a trio of ETFs that wlll adjust their factor exposures based on market conditions. The three funds track indexes based on a Research Affiliates methodology that targets the value, low-volatility, quality, momentum and size factors, while also incorporating elements of Research Affiliates’ fundamental weighting approach.

The new funds, their tickers and expense ratios are as follows:

• PIMCO RAFI Dynamic Multi-Factor U.S. Equity ETF (MFUS), 0.29%
• PIMCO RAFI Dynamic Multi-Factor Emerging Markets Equity ETF (MFEM), 0.49%
• PIMCO RAFI Dynamic Multi-Factor International Equity ETF (MFDX), 0.39%

All three are listed on the NYSE Arca exchange.

“These ETFs help investors overcome the challenge of determining which factors to include and at what weighting. By dynamically adjusting factor allocations in an ever-changing market, PIMCO RAFI Dynamic Multi-Factor Equity ETFs offer a compelling solution for clients navigating an increasingly disparate smart-beta and factor landscape,” said PIMCO Executive Vice President Andrew Pyne, one of the firm’s strategists focused on equity solutions.

Methodology

Generally speaking, companies are first assigned a fundamental weight based on their sales; cash flow; dividends and buybacks; and book value. Then they are ranked based on that weight, with the top 86% of the universe selected for inclusion in the index, the prospectus said.

From those components, the methodology creates factor portfolios, each focused on an individual factor and drawn from all the stocks remaining in the universe. Companies are ranked by their score for each factor, with the top 25% selected for inclusion based on fundamental weight (though for momentum, the top 50% are selected). Generally, these factor-focused subgroups are reconstituted in stages, with each subgroup divided into four tranches. Each quarter, one of the tranches gets reconstituted.

The overall index is rebalanced quarterly, with weights also allocated to the different factors quarterly. Those weightings are largely determined by an equal-weighting approach adjusted by the factor’s momentum and long-term reversal signal relative to the other factors, the prospectus said.

The new ETFs “marry multifactor investing with a true smart-beta strategy, Fundamental Index, thereby providing two alpha engines in a single package,” noted Research Affiliates Chairman and CEO Rob Arnott.

Additional Details

MFEM’s index had 606 components drawn from 23 emerging market countries as of the end of May, while MFDX’s underlying index had 2,379 component securities drawn from 22 developed markets. The U.S. index had 988 components.

These are the first ETFs of their kind. According to PIMCO’s press release, they have the “potential to outperform” the broad equity market on a long-term basis via an approach that seeks to de-emphasize expensive factors and target the undervalued factors.

Contact Heather Bell at [email protected]