ETF Of The Week: 'Reverse'-Cap Fund Sees Flows

December 06, 2019

In recent weeks, the billion-dollar club has welcomed a curious new member: the iShares Edge MSCI U.S.A. Size Factor ETF (SIZE).

Since Nov. 14, SIZE has brought in $1.03 billion in new net investment assets, including a massive $658 million intake on Nov. 15:

Source: ETF.com; data as of Dec. 5, 2019

 

We noted this big inflow at the time. Since then, SIZE has continued to take in money; as of Dec. 5, the fund's assets stood at $1.46 billion, making it by far the largest of the three inverse market cap ETFs on the market.

SIZE's competitors, the Reverse Cap Weighted U.S. Large Cap ETF (RVRS) and the Invesco Russell 1000 Size Factor ETF (OSIZ), have $9.6 million and $7.3 million in assets under management, respectively.

Inverse-cap-weighted ETFs lean into the size factor, prioritizing high-risk, high-performance small caps to help juice the returns of broad-based equity indexes. But for years, the strategy has struggled to find footing with investors. However, SIZE's recent inflows suggest that maybe investors' minds have started to change.

Multiple Angles On Inverse

Of the three, RVRS is probably the truest to the spirit of inverse-cap weighting, or at least what investors might expect when they hear the term "inverse-cap weighting": The ETF inversely weights equities in the S&P 500 Index, giving the smallest stocks the largest weights.

SIZE takes a much different approach, weighting its holdings by the inverse of the natural logarithm of their market capitalizations. Natural logarithms—or ln(x)are a common algebraic tool; a number's natural logarithm is the exponential power to which the irrational number, e, would have to be raised in order to equal that number.

(OSIZ takes a similar tack as SIZE, but uses the logarithm of market cap, instead of the natural logarithm.)

Difference An ln(x) Makes

Weighting by ln(x) instead of 1/x has the effect of muting the impact of inversion, giving large  and midcap stocks greater weight in the index than they might otherwise have. As a result, SIZE's portfolio actually resembles that of an equal-weighted equity fund, just with a moderate weighting boost to smaller cap stocks.

For example, compare SIZE's sector weights against that of the iShares MSCI U.S.A. Equal Weighted ETF (EUSA), which equal-weights mostly large and midcap U.S. stocks:

Sector Breakdown Of SIZE vs. EUSA & RVRS
  SIZE EUSA RVRS
Financials 20.86% 20.51% 18.61%
Consumer Cyclicals 15.93% 16.37% 24.19%
Technology 15.40% 15.55% 9.90%
Industrials 14.90% 14.49% 14.80%
Healthcare 11.28% 10.97% 8.27%
Consumer Non-Cyclicals 5.81% 5.93% 6.92%
Basic Materials 5.15% 5.00% 6.24%
Utilities 5.07% 4.80% 4.24%
Energy 4.41% 5.23% 6.36%
Telecommunications 1.18% 1.13% 0.46%

Source: ETF.com; data as of Dec. 5, 2019

 

Save for a meaningful difference in energy allocation, SIZE’s and EUSA's sector weights are almost identical, with weightings in the two funds falling within half a percentage point of each other. However, SIZE looks radically different from RVRS, its intended competitor, with nearly an 8% delta between the two ETFs in their consumer cyclical allocation.

The similarities don't stop there. Six of SIZE's top 10 stocks are the same as EUSA's, with roughly the same weights; but none of SIZE's top 10 overlaps with RVRS':

Top Ten Stocks & Weights
SIZE EUSA RVRS
Bristol-Myers Squibb Company 0.22% Bristol-Myers Squibb Company 0.24% Coty Inc. Class A 1.22%
Alnylam Pharmaceuticals, Inc 0.21% Alnylam Pharmaceuticals, Inc 0.21% Las Vegas Sands Corp. 1.16%
TD Ameritrade Holding Corporation 0.20% Splunk Inc. 0.20% Nordstrom, Inc. 1.09%
Splunk Inc. 0.20% TD Ameritrade Holding Corporation 0.20% Capri Holdings Limited 0.90%
Paycom Software, Inc. 0.19% Paycom Software, Inc. 0.19% L Brands, Inc. 0.82%
Grubhub, Inc. 0.18% Sarepta Therapeutics, Inc. 0.18% Macerich Company 0.81%
Jazz Pharmaceuticals Plc 0.18% DexCom, Inc. 0.18% Affiliated Managers Group, Inc. 0.80%
Sarepta Therapeutics, Inc. 0.18% Charles Schwab Corporation 0.18% Leggett & Platt, Incorporated 0.80%
Jefferies Financial Group Inc. 0.18% Uber Technologies, Inc. 0.18% Gap, Inc. 0.79%
Ionis Pharmaceuticals, Inc. 0.18% Target Corporation 0.18% Cimarex Energy Co. 0.77%

Source: ETF.com; data as of Dec. 5, 2019

 

Clearly, SIZE's investors don't seem to mind that the ETF is essentially an equal-weighted fund in disguise—and more power to them—but we see this as a clear example of why investors should check under the hood before they buy any fund, even if it means brushing up on high school algebra first.

Check Under The Hood

One last thing: Although SIZE has been on the market since 2013, the fund only switched to its current reverse-ln(x) methodology a year ago. Prior to Dec. 2018, SIZE instead tracked a low-volatility factor index.

Investors should keep this in mind when evaluating SIZE's historical performance, because any returns over a year old would be the result of low-volatility weighting, not inverse-weighting.

Contact Lara Crigger at [email protected]

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