The wait is finally over for the highly anticipated debut of USAA as an ETF issuer. After more than three years since they first requested permission to bring ETFs to market, USAA is listing today its first six ETFs on the NYSE Arca.
The lineup includes four MSCI-linked smart-beta equity ETFs that blend value and momentum, and two actively managed aggregate-type bond funds. They are:
- USAA MSCI USA Value Momentum Blend Index ETF (ULVM), net expense ratio of 0.20%
- USAA MSCI USA Small Cap Value Momentum Blend Index ETF (USVM), net ER 0.25%
- USAA MSCI International Value Momentum Blend Index ETF (UIVM), net ER 0.35%
- USAA MSCI Emerging Markets Value Momentum Blend Index ETF (UEVM), net ER 0.45%
- USAA Core Short-Term Bond ETF (USTB), net ER 0.35%
- USAA Core Intermediate-Term Bond ETF (UITB), net ER 0.40%
The initial lineup of what USAA is calling a “core” offering speaks directly to the firm’s DNA—an institution that has been known as one of the most innovative adopters of smart beta-ETFs, and one with extensive expertise in fixed income.
USAA today has $5.5 billion invested in ETFs, half of which is tied to smart-beta strategies. On the fixed-income front, USAA has $75 billion in assets in 40 mutual funds, many of them fixed-income strategies. While new products, the bond ETFs will have the same team of portfolio managers as the bond mutual funds.
What’s unique about these ETFs themselves is the approach. The equity funds will own only stocks that show both value and momentum characteristics, blending the two factors USAA believes offer the “most effective and most persistent source of factor performance,” according to Lance Humphrey, portfolio manager for USAA’s global multi-assets.
“As we’ve been investing in smart-beta ETFs over the past few years, we’ve done extensive research into factor-based investing and smart beta, and we wanted to bring to market products that we would like to use in a portfolio,” he said.
Unfilled Space
“There are many multifactor ETFs, but we didn’t find many that explored the benefits of putting value and momentum together from a correlation standpoint and benefits to performance,” Humphrey added. “That space has not been filled.”
The securities in each portfolio are risk-weighted, with most volatile stocks assigned a lower weighting in an effort to have each holding contribute a similar amount to risk to the overall portfolio.
The two fixed-income ETFs tap into USAA’s in-house expertise, owning dollar-denominated bonds much like an aggregate bond portfolio, but tilting toward credit for some extra juice, John Spear, chief investment officer, USAA Mutual Funds, says.
“We are traditionally heavy credit in the fixed-income space, but the ETFs we are launching will have more Treasury and agency securities than we normally traffic in, so it will be a more liquid type of portfolio, with a Barclays Agg type of flavor, but still relying on our credit tilt as a way to outperform,” Spear said.
Both U.S. smart-beta ETFs are being seeded by market makers with about $5 million each, and the international and emerging market funds are coming to market with about $10 million each. Fixed-income ETFs are coming to market with $25 million each. USAA may become an investor in these ETFs over time.
“We set out to create a core set of ETFs that allow our members and other investors to build a core globally diversified portfolio,” Humphrey said. “We wanted to come out with the fewest number of ETFs possible needed for that.”
USAA first filed for ETFs in 2014, and then in 2016 sought permission to issue ETFs as share classes of mutual funds, an approach patented by Vanguard. Today’s launch, however, consists of six brand-new products because the company does not have smart-beta mutual funds, and in the bond space, it would have “slowed down the approval process” going the share-class route.
“It would have taken too long to go that route, so we decided to create new products as a faster way to come to market,” Spear said. “We may choose to use the share class model on future ETFs.”
