There’s been a clear trend this year of new ETF listings employing Smart Beta strategies, in an effort to differentiate themselves and overcome the limitations of traditional market cap weighted indexes. Blackrock's iShares has just launched 4 new ETFs as part of their ‘Edge’ series (their Smart Beta funds, designed to form the ‘edges’ of your portfolio as opposed to their traditional ‘Core’ offerings). The new ETFs on offer include an Australian and Global low volatility option as well as Australian and Global ‘multifactor’ options. The new offerings are quite unique in the ASX available ETF space. We take a look at what these funds bring below.
The new low volatility offerings include the iShares Edge MSCI Australia Minimum Volatility ETF (MVOL) and the iShares Edge MSCI World Multifactor ETF (WDMF). The objective of these funds is to invest in a portfolio of stocks that in aggregate have lower volatility relative to the broader market. The Australian version currently holds 98 underlying stocks, and the international version holds 485. The indexes that these funds track essentially use algorithms to optimise a low volatility portfolio based on individual stock volatility and correlations across stocks. The product briefs (Australian Fund - MVOL, International Fund – WVOL) show hypothetical performance history of both indexes back to 2001 with reduced risk and increased return against the broader benchmark indexes.
There’s currently no comparable options to these funds available on the ASX, where the specific goal is low volatility. ANZ ETFS offers their S&P 500 High Yield Low Volatility ETF (ZYUS), however this fund is focused on yield as well as volatility and focuses just on the US, rather than the broader global market. Betashares offers their Managed Risk Australian Share Fund (AUST), again this fund has a slightly different aim, where the portfolio is designed to hedge against volatility as well as defend against losses in declining markets.
The new Multifactor ETFs may be a little more difficult to understand than the Low Volatility options. The funds are iShares Edge MSCI Australia Multifactor ETF (AUMF) and iShares Edge MSCI World Multifactor ETF (WDMF). Like the low volatility options, a rules based index has been developed, however for the multifactor ETFs the rules behind the index are best explained in the below infographic provided by iShares in their product briefs (AUMF, WDMF):
These Multifactor offerings are also unique offerings within the ASX listed ETF space. In fact, it could be argued that they share more in common with an actively managed fund than a traditional index fund, as many active fund managers use these quantitative style factors in constructing their portfolios. At 0.30% and 0.35% pa management cost this may be a way for investors to access this style of investing at a much lower cost to actively managed funds.
The new iShares offerings potentially bring the next era of smart beta to the Australian market, with rules based indexes which begin to blur the gap between active and passive investing. The funds are low cost with Management fees of 0.30-0.35%pa and show backtested performance which outperforms the broader indexes over the long term, however this is where one of the major risks lie. The rules which worked yesterday may not work in the future and is this rings true for all 'Smart Beta' strategies who build alternate indexes in an attempt to outperform traditional market cap weighted indexes. As a result we recommend investors seek professional advice to determine if these funds are appropriate for you.