In the first half of 2018, traditional market-cap weighted index ETFs performed better than many so-called “smart beta” ETFs, as the best-performing stocks in the S&P 500 were absent from value, quality or low-volatility strategies. However, the growing number of smart beta strategies should be assessed based on more than past performance.
While it lost some ground after reporting results this month, Netflix was one of the highest flying constituents year-to-date through June, doubling in price. Meanwhile, other consumer discretionary stocks, Chipotle and Macy’s, were among the S&P 500’s top 10 performers. Within technology, recent index addition Twitter was up 82 percent in the first half.
Nick Kalivas, senior equity product strategist with Invesco, spoke to CFRA at the recent Inside Smart Beta conference. Kalivas explained market-cap weighted ETFs’ align price and weighting in the portfolio, but with smart beta that linkage is broken and a specific factor is used to determine the exposure. What you end up with has a different return and risk profile than the broader index by dicing it up.
For example, with Invesco S&P 500 Low Volatility (SPLV) investors get the quintile of the S&P 500 Index with the lowest volatility; with Invesco S&P 500 High Quality (SPHQ) investors get 100 stocks with the strongest balance sheet quality characteristics. According to CFRA’s research, both ETFs have relatively high consumer staples exposure relative to the broader index, but SPLV has more utilities and SPHQ has more industrials exposure.
In the first half, both SPLV and SPHQ underperformed the Vanguard S&P 500 Index (VOO), while Invesco S&P 500 Momentum (SPMO) outperformed. Kalivas thinks as profit growth decelerates and the economic cycle ages, quality and low volatility strategies are going to come on the radar screen for advisors.
In the video, Kalivas also noted that there are small- and mid-cap versions of the low volatility suite. However, there are sector differences between those ETFs and SPLV. For example, Invesco S&P Mid-Cap Low Volatility (XMLV) has a higher stake in real estate (24 percent of assets vs. 13 percent for SPLV) and a lower stake in consumer staples (5 percent vs. 10 percent).
Invesco’s own single factor ETFs lineup goes back to more than a decade and includes products that were added through the recent acquisition of Guggenheim, such as Invesco S&P 500 Pure Growth (RPG), many other firms have expanded their ETF presence using single or multi-factor ETFs.
In another interview with CFRA at the Inside Smart Beta conference, Index IQ's Chief investment Officer Sal Bruno explained that while his firm has historically been known for liquid alternatives, more recently the product lineup has been broadened out taking a factor approach to equities. IQ Chaikin US Large Cap (CLRG) and IQ Chaikin US Small Cap (CSML) launched in 2017 and have gathered approximately $950 million in combined assets.
While many multi-factor ETFs such as iShares Edge MSCI MultiFactor USA (LRGF) and Xtrackers Russell 2000 Comprehensive Factor (DESC) screen stocks based on value, momentum and other characteristics, CLRG and CSML use many metrics that are distinct.
The IQ Chaikin offerings look for growth factors such as earnings consistency and surprises and sentiment indicators such as insider activity, short interest and analyst ratings. Bruno explained these factors help to give a 360-degree view of the security chosen.
Despite the growth inclusion, CLRG has more exposure to financials than LRGF (38 percent of assets vs. 11 percent) and less in technology (15 percent vs. 26 percent).
However, it’s important to understand that when investors shift their market-cap focus, sector exposure can be different. The largest sector in the small-cap CSML was industrials (29 percent of assets), but financials (25 percent) and consumer discretionary (17 percent) exposure was also relatively high.
You can view our other video interviews from the conference here.
Todd Rosenbluth is the director of ETF research at CFRA. CRFA rates approximately 1,150 equity ETFs based on a combination of holdings-level analysis and fund attributes. Our research includes valuation and risk considerations of the portfolio, along with expense ratio and bid/ask spreads.
Paul Beland, deputy director of Research at CFRA, and I will be hosting a webinar on July 25 at 11 a.m. ET titled Active Mutual Funds vs. Index ETFs, with a focus on how smart beta ETFs have performed in the first half of 2018 and what’s ahead. To register, go to: https://go.cfraresearch.com/ l/482681/2018-07-02/mjq58.