Old-School Smart Beta ETFs Worth A Look

Old-School Smart Beta ETFs Worth A Look

Some of the earlier smart-beta funds have a lot to recommend them.

Reviewed by: Todd Rosenbluth
Edited by: Todd Rosenbluth

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

Every year, a crop of new “gourmet” restaurants open with fanfare, but only some of them have the staying power to survive five years or longer. Similarly, ETFs regularly come to market and seek to offer a better alternative to the entrenched securities in client portfolios.

While CFRA Research thinks age should not matter when choosing an ETF, ranking approximately 400 equity products that launched since May 2014, there are many earlier-generation, smart-beta ETFs worthy of investor attention.

Later this week, CFRA will be speaking on an ETF due diligence panel at the Inside Smart Beta conference.

Multifaceted Approaches

We consider smart-beta ETFs to be those index-based products that are constructed differently than market-cap-weighted offerings, such as the SPDR S&P 500 Index (SPY) and the iShares Russell 1000 (IWB).

In recent years, the approaches have become multifaceted, with securities inside the ETF needing to meet multiple criteria including dividends, low volatility, momentum, quality, size and value.

These include the Deutsche x-Trackers Russell 2000 Comprehensive Factor (DESC) and the Legg Mason International Low Volatility High Dividend (LVHI) from the 2016 class. Meanwhile, in May 2017, the IQ Chaikin US Small Cap (CSML) came to market based a 20-factor quantitative model that combines fundamental, earnings, technical and sentiment components.

To us, these are the next generation of smart-beta ETFs, which piggyback on the popularity of some single-factor products.

These include the momentum-focused First Trust Dorsey Wright Focus 5 ETF (FV) and low-volatility offerings of the iShares USA Minimum Volatility (USMV) and the PowerShares S&P 500 Low Volatility (SPLV). Launching between 2011 and 2014, the trio quickly gathered more than $1 billion each in assets, but have also periodically moved out of favor somewhat with investors when sentiment toward the targeted factor eroded.


Sample Smart-Beta ETFs: New School vs. Old School

TickerYearAssets ($M)Expense Ratio




The Appeal Of First-Gen Smart Beta
However, CFRA Research thinks some smart-beta products that launched between 2003 and 2008 also have many favorable traits. In ranking approximately 1,000 equity ETFs, CFRA combines holdings-level analysis with ETF attributes.

To us, whether the stocks inside the fund are appealing on a valuation and/or risk perspective and the cost implications of buying and selling the product matter more than its historical track record. Unlike actively managed mutual funds, index-based products are seeking to replicate, not outperform, a benchmark, making a three-year relative performance less meaningful.

The Guggenheim S&P 500 Equal Weight (RSP) launched in 2003 and has $13 billion in assets. The stocks inside this ETF are the same as can be found in SPY. Yet rather than being dominated by the biggest companies such as Apple, Microsoft, Amazon, Facebook and Johnson & Johnson—all strong stocks on a valuation and/or risk perspective to CFRA—RSP holds a similar weighting in all S&P 500 constituents.

These include more moderately sized ConocoPhillips, Darden Restaurants and Marriot International, all CFRA buy recommendations. RSP has a 0.40% net expense ratio.

The PowerShares FTSE RAFI 1000 Portfolio (PRF) came to market in 2005 and has approximately $5 billion in assets. PRF is constructed based on book value, cash flow, sales and dividends, weighted annually by these fundamental attributes. Exxon Mobil was recently the largest position, ahead of Apple, and is followed in size by Chevron and JPMorgan Chase.

The portfolio is viewed favorably by CFRA for the valuation of its holdings in addition to holding companies with favorable S&P Global Credit Ratings. PRF has a 0.39% net expense ratio.

WisdomTree & Oppenheimer Offerings

The WisdomTree LargeCap Dividend Fund (DLN) launched in 2006 and has approximately $2 billion in assets. DLN tracks a proprietary index of 300 large-cap dividend-paying companies and is weighted annually to reflect cash dividends. While Apple and Microsoft are the two largest holdings, AT&T and Procter & Gamble are also recent top-10 holdings; nondividend payers Amazon and Facebook are not in the portfolio.

CFRA views the stocks inside as appealing from a risk considerations perspective aided by the consistent earnings and dividend record of the holdings and the strong credit ratings of the parent companies. Furthermore, we think many of the stocks have attractive valuations. DLN has a 0.28% net expense ratio.

The Oppenheimer Large Cap Revenue (RWL) also holds the same stocks in the S&P 500 Index as SPY, but is constructed based on revenues of the constituents, rebalanced quarterly, and not market cap.


As such, Walmart, which is a CFRA Strong Buy recommendation, is the largest holding. Top-10 holdings also include undervalued Apple, General Motors and UnitedHealth Group. CFRA views the collective holdings as attractively valued and incurring moderate risks. RWL has a 0.39% net expense ratio. The ETF launched in 2008 and has approximately $660 million in assets.

Similar to RSP, RWL has more exposure to the consumer discretionary sector and less in the information technology sector than SPY, despite holding same securities.


Same S&P 500 Index, Different Exposure

Source: CFRA’s MarketScope Advisor, June 5, 2017


By rebalancing throughout the year, RSP, PRF, DLN and RWL enable investors to essentially increase exposure to the stocks that better reflect the smart-beta attributes (size, value, dividends and revenues, respectively) in the ETF wrapper without regularly incurring capital gains that are traditional for actively managed mutual funds.

While these are examples of smart-beta ETFs that have favorable holding-based attributes, there are others that are not as worthy of attention, in our opinion. The term “smart-beta ETF” presumes that all nonmarket-cap-weighted ETFs are strong candidates for consideration.

But just as informed diners would not simply take a restaurant’s word for it that gourmet food is being served, investors should not take an asset manager at face value when they claim that what’s inside the ETF in question is of the highest quality.

CFRA Research reports on the above ETFs can be found on MarketScope Advisor and other platforms.

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.