Ratings-Based ETFs Debut

September 25, 2019

Today Columbia Threadneedle added two new equity ETFs to its lineup. The Columbia Research Enhanced Core ETF (RECS) and Columbia Research Enhanced Value ETF (REVS) are both derived from Russell Indexes.

RECS comes with an expense ratio of 0.15%, while REVS charges 0.19%. The ETFs list on the NYSE Arca.

It should be noted that the funds have exactly the same expense ratios as the iShares Russell 1000 ETF (IWB) and the iShares Russell 1000 Value ETF (IWD), respectively.

“We’re taking the Russell 1000 and we’re going to overlay our quantitative research, which we’ve been using for 15 years and which powers billions of dollars of asset management products, and we’re going to remove the names that we don’t like,” said Marc Zeitoun, Columbia Threadneedle’s head of strategic beta.

Methodology

Both funds rely on the ratings provided by Columbia Threadneedle’s quantitative investment research team. The team’s ratings are arrived at via a multifactor model, with the scale ranging from 1 (the top 15% of companies) to 5 (the bottom 15% of companies).

A company’s rating is generally determined by its factor scores in the area of quality, value and “catalyst,” the last of which takes into account data like price momentum, the prospectus says.

“Research is the critical foundation of any active manager,” said Zeitoun. “Everything we do is informed by our active research.”

With the newly launched ETFs, Zeitoun said his firm is “trying to bridge the gap between pure beta and pure alpha.”

The ETFs’ underlying indexes select components from the Russell 1000 for RECS and the Russell 1000 Value Index for REVS. Only stocks that are rated 1 or 2 are included in the index, unless there are not enough securities in a particular sector rated as such, in which case stocks with a 3 rating are included.

The selected stocks are all weighted by market capitalization within their respective sectors, which reflect the sector weights of the parent indexes. According to Columbia Threadneedle, the underlying index for RECS will typically include 325 to 400 stocks, while REVS will typically include 250 to 290 stocks. The indexes are rebalanced every six months, the document says.

Interestingly, the biotechnology group is unrated, and all the biotech companies are automatically included in the index, according to the fund’s prospectus.

Contact Heather Bell at [email protected]

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