How Factors Can Skew ETF Exposure

Factor screens can lead to higher concentration compared to market cap.

Reviewed by: Todd Rosenbluth
Edited by: Todd Rosenbluth

Todd Rosenbluth is director of ETF and mutual fund research at CFRA.

In the first seven months of 2017, investors favored well-diversified U.S. equity and international equity ETFs. CFRA sees continued growth of these well-established, low-cost products as a sign that ETF adoption is still in the early stages.

Indeed, the iShares MSCI EAFE ETF (EFA) gathered $9.5 billion in assets under management (AUM) so far this year, while the Vanguard FTSE Emerging Markets (VWO) and the iShares Core S&P Mid-Cap ETF (IJH) pulled in $6.1 billion and $2.7 billion, respectively, according to data.

As investors gain greater comfort in using ETFs for their asset allocation needs, we think newer products that slice the market based on factors such as low volatility, quality or momentum will be appealing.

These ETFs are structured based on tools active managers have used for years. Yet due diligence is a key to understanding the exposure these products provide relative to the market-cap-weighted alternatives.

Low-Vol Midcaps Skew To Defensive Sectors

The PowerShares S&P MidCap Low Volatility Portfolio (XMLV) is a good example. The ETF focuses on 80 stocks with the lowest volatility in the midcap S&P 400 Index, without a focus on sector representation.

Relative to IJH, XMLV recently had significantly higher asset exposure to real estate (21% vs. 10%) and utilities (17% vs. 6%), and much lower exposure to information technology (6% vs.18%) and health care (4% vs. 9%). Other large weightings for XMLV are financials (19%) and industrials (12%).


Source: CFRA’s MarketScope Advisor, June 2017


XMLV had been a strong performer in 2017, rising 8.3% through July 31, ahead of the 6.9% for IJH. Some of the better-performing stocks in XMLV include insurers American Financial Group and Everest Re Group. XMLV has $1.1 billion in AUM and a 0.25% net expense ratio.

How Momentum Impacts Int’l Exposure

In contrast to the lower-risk XMLV, the iShares Edge MSCI International Momentum Factor ETF (IMTM) focuses on developed international stocks with the highest relative price momentum.

Relative to the iShares Core MSCI International Developed Markets ETF (IDEV) that tracks IMTM’s parent index, IMTM recently had more asset exposure to France (15% vs. 9%) and Germany (11% vs. 8%), and a lower stake in Japan (13% vs. 22%) and the U.K. (13% vs. 16%).


From a sector perspective, financials (31% vs. 22%) and technology (10% vs. 6%) stocks are well-represented. IMTM has $35 million in AUM and a 0.30% net expense ratio, compared with IDEV’s $66 million in AUM and its expense ratio of 0.07%.

IMTM’s 18.0% year-to-date return through July was slightly ahead of EFA’s 17.8% gain, and is almost as strong as the 22% gain for the U.S. version: the iShares Edge MSCI USA Momentum Factor ETF (MTUM), which has $3.5 billion in AUM and a 0.15% expense ratio. Unlike EFA, IMTM and IDEV have exposure to Canadian stocks.


Title Toward Eurozone Markets

Source: CFRA’s MarketScope Advisor, June 2017


The Multifactor Effect

Investors are increasingly looking to ETFs that combine factors such as low volatility and momentum with size, quality and/or value, diversifying away some of the dependence on a one- screen attribute. Yet an understanding of how the sector/country exposures compare to a market-cap-weighted approach is important.

For example, the JPMorgan Diversified Return Emerging Markets Equity ETF (JPEM) screens stocks within the FTSE Emerging Markets Index based on value, quality and momentum factors, and combines region and sector weighting process focused on low volatility.

Relative to the Vanguard FTSE Emerging Markets ETF (VWO), JPEM recently had more exposure to the smaller emerging markets, such as Indonesia (6% vs. 3%) and Malaysia (6% vs. 4%). Stakes in larger markets such China (21% vs. 29%) and India (8% vs. 12%) are more moderate. VWO has $60 billion in AUM with a 0.14% expense ratio, and JPEM has $160 million in AUM and a 0.51% expense ratio.

Meanwhile, the Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (DEMG)—with $13 million in AUM and a 0.50% expense ratio—scores stocks within the same parent FTSE index as JPEM based on their combined value, quality and momentum attributes, as well as size and low volatility factors. As a result, DEMG has more asset exposure to South Africa (13% vs. 8% for VWO and 6% for JPEM) and less exposure to China (16%).

VWO’s 21% gain in the first seven months of 2017 was stronger than the 19% and 16% for JPEM and DEMG, respectively.

Of course, past performance is not indicative of future results, and CFRA thinks investors need to do their homework to understand the exposure differences. Our reports incorporate holdings-level analysis and ETF attributes, including expense ratio and trading costs.

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him at @ToddCFRA.


Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence’s equity and fund business in October 2016. Follow him at @ToddCFRA.