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.
“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.”
iShares Debuts ‘USHY’
iShares is breaking new ground in the world of fixed-income ETFs today with the launch of the iShares Broad USD High Yield Corporate Bond ETF (USHY).
The fund goes beyond the reach of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG)—the largest junk bond fund, with $20 billion in assets—by tapping into a broader universe of dollar-denominated high-yield bonds in the U.S., owning roughly twice as many bonds as HYG from 2.5 times as many issuers.
USHY offers that broader exposure for less than half the cost of HYG—it comes to market with an expense ratio of 0.22%, or $22 per $10,000 invested, which compares to HYG’s 0.49% price tag.
These corporate bonds in the portfolio, according to the company, may have “risk exposure” to other regions outside the U.S., including Japan, U.K., Canada, Australia, New Zealand, Switzerland, Norway, Sweden and the eurozone. Ultimately, USHY tilts smaller and should deliver an incrementally higher yield than HYG, which has a current 30-day yield of 4.7%.
“This high-yield ETF is designed specifically to address investor demand to cover a much broader representation of the high-yield market,” said Steve Laipply, head of iShares fixed income strategy.
There’s really no funds quite like USHY on the market today, according to Laipply, who says the fund’s launch is part of what BlackRock sees as an ongoing “modernization” of the bond market, with product development and asset growth picking up pace.
USHY joins other high-yield bond ETFs, including the global iShares International High Yield Bond ETF (HYXU), which is a local currency take on high yield bonds, and the competing First Trust Tactical High Yield ETF (HYLS), which is an actively managed long/short high-yield bond portfolio that’s not limited to dollar-denominated bonds.
So far this year, these strategies have delivered various results, all outperforming the iShares Core U.S. Aggregate Bond ETF (AGG).
Chart courtesy of StockCharts.com
USHY tracks the BofA Merrill Lynch U.S. High Yield Constrained Index, a modified market-value-weighted index with more than 1,800 holdings, and a cap on each issuer of 2%.
Contact Cinthia Murphy at [email protected]