That momentum metric is measured by a stock’s price movement over the previous six to 12 months based on daily returns, the fund’s prospectus said. Stocks are then assigned a momentum score, which is then multiplied by a company’s free-float market capitalization to determine the weighting each security is assigned in the portfolio.
The iShares MSCI USA Size Factor ETF (NYSEArca: SIZE) tracks an index that “reweights” the securities comprising the broader MSCI USA Index in an effort to have those with relatively smaller average market capitalization and lower risk profiles represent a larger percentage of the mix.
Risk, in this case, is measured as historical variance over a three-year period of weekly return data, with those with the lowest variance ranking highest in the portfolio, the fund’s prospectus said. In the end, the methodology is designed to show lower realized volatility relative to the parent MSCI index.
Finally, the iShares MSCI USA Value Factor ETF (NYSEArca: VLUE) applies the same reweighting concept to the broader MSCI USA Index, but hones in on stocks that show lower market value relative to “certain accounting measures of value,” such as book value, three-year moving average of sales, earnings and cash earnings, according to the fund’s prospectus.
The new ETFs will join the iShares MSCI USA Index Fund (NYSEArca: EUSA), which has gathered $159 million since it came to market in mid-2010. EUSA has an annual expense ratio of 0.15 percent.
BlackRock Enters The iShares Picture
iShares, which boasts nearly $600 billion of U.S.-listed ETF assets and commands roughly a third of the entire U.S. ETF market, first won approval from regulators to market actively managed ETFs two years ago.
But when it comes to iShares’ decision to go this route, Carver noted it had nothing to do with taking a stand on the debate between passive versus active management—active management allows for flexibility around portfolio construction, he said.
“In the case of [the] enhanced [suite], it’s unique because for the first time we are bringing the full capabilities of BlackRock—research capabilities—into the ETFs done with collaboration from clients,” Carver said.
That collaboration with RIA clients came in the form of a consortium of 60 firms that provided feedback throughout much of the development of these products. BlackRock provided the active management and research expertise.
The “enhanced” suite of ETFs comprising IELG and IESM are built off a two-part process that begins with securities selection—the scoring of stocks on measures of quality, value and size—followed by portfolio construction, at which point certain “constraints” are applied such as keeping the exposure long-only and avoiding sector concentration, Carver said.
“We expect the iShares enhanced suite will be used more as a strategic long-term holding,” he concluded.