Factor-ETF Focus: SIZE Hits 1-Year Mark

A sheep in wolf’s clothing? SIZE’s low-vol twist defies easy categorization.

Senior ETF Specialist
Reviewed by: Paul Britt
Edited by: Paul Britt

A sheep in wolf’s clothing? SIZE’s low-vol twist defies easy categorization.

With an abundance of complex factor-based ETFs on the market, the iShares MSCI USA Size Factor ETF (SIZE | B-78) seems to play it straight, based on its name. After all, the size factor—a bias toward smaller firms—is well established (along with the style factor) by seminal research from Eugene Fama and Ken French.

But SIZE isn’t quite what it seems on the surface. Despite its name and ticker, the fund does not screen for size. SIZE holds every stock in its large- and midcap parent index, but reweights the stocks by volatility; that is, stocks with lower volatility receive higher weight.

Specifically, the fund looks at the variance (the square of standard deviation) of each stock’s weekly returns over the past three years, scaling the inverse of each stock’s variance by the sum of the portfolio’s inverse variance. That sounds more complicated than it is: SIZE is simply a portfolio of large- and midcap stocks weighted by low vol.

I dwell on the mechanics here to argue that SIZE is worth comparing to a low-vol fund as well as a traditional size-factor fund.

For the low-vol fund, I’ll use the iShares MSCI USA Minimum Volatility ETF (USMV | A-56). USMV relies on classic portfolio math and an optimizer to deliver a low-volatility portfolio. In contrast, SIZE is a portfolio of low-vol stocks, akin to the PowerShares S&P 500 Low Volatility ETF (SPLV | A-45) in this respect. Still, USMV and SPLV weed out many stocks that don’t make the cut, while SIZE holds its full parent basket and only weights by volatility.

Does this make SIZE a kindler, version gentler version of USMV? In many ways, yes, based on the table below.

SIZE splits the difference with USMV when compared with our benchmark: on risk, on the number of significant sector biases, and on the ETF.com Fit score—a comprehensive measure of alignment with the market. In the recent upmarket over the past 12 months, you’d expect the returns of the more risk-averse fund (USMV) to lag more than the comparatively less-risk-averse fund (SIZE), and that’s exactly what we see.



In sum, SIZE is a low-risk portfolio that differs moderately, rather than radically, from the market.

But the table also shows that SIZE does indeed deliver a major tilt toward smaller firms, as measured by the weighted average market cap of the portfolio. In fact, it tilts smaller than the more pure-play size-and-style tilts fund, the FlexShares Morningstar U.S. Market Factor Tilt ETF (TILT | A-80).

TILT uses the classic Fama-French approach, so it aims for a small-cap value bias. In the snapshot above, however, SIZE has more of a value bias than TILT. That’s an impressive feat, given that P/E and P/B metrics tend to be more “growth-y” in smaller firms.

The likely explanation is that TILT actually has more small-caps in its basket, while TILT is confined to midcaps by dint of its universe. (Click on the fund-report links above for the market-cap distribution for each fund.) In this respect, SIZE’s very low average market cap is deceiving.

More importantly, TILT carries more risk as shown by beta, and sure enough, has higher returns than the market over the past 12 months. In short, TILT looks like a classic size-and-style tilt fund to me, taking a bit more risk (when only measuring beta) and earning higher returns in good times.

In contrast, SIZE favors smaller firms—midcaps not small-caps—but its low-vol methodology carries the day, as it modestly tamps down market risk.

SIZE’s inability to fit into a neat pigeonhole doesn’t make it a bad fund. It’s just misnamed, plain and simple in my view. That’s a shame, because I believe SIZE can work as long-term core U.S. equity allocation for clients who want a smidge less risk while maintaining plenty of equity upside.



At the time this article was written, the author held no position in the securities mentioned. Contact Paul Britt at [email protected] or follow him on Twitter @PaulBritt_ETF.

Paul Britt, CFA, is a senior analyst in the ETF Analytics group at FactSet, a team that maintains and develops an industry-leading suite of ETF-related data and analytics products. Prior to joining FactSet in April 2015, he was a senior analyst at etf.com, where he performed a similar role, and worked in private placement at Pensco Trust. Paul holds a B.S. from RIT and an M.S. in financial analysis from the University of San Francisco.