Invesco PowerShares has launched five European equity ETFs, each offering focused exposure to a single factor – value, quality, low beta, price momentum, and earnings momentum.
Chris Mellor, equity product specialist at Invesco PowerShares.
The new ETFs track Solactive’s Tradable European Factor indices, which are derived from a universe of 675 stocks (Solactive Europe Total Market 675 Index). Each index is created by selecting the 50 stocks with the greatest exposure to the respective factor. Liquidity and tradability of the underlying stocks are taken into account to reduce concentration risk, while the indices are rebalanced monthly.
The range of ETFs, each available to trade in euros on Deutsche Börse for an annual fee of 0.30%, is outlined below.
PowerShares Tradable European Value Factor UCITS ETF (PFTV GY)
PowerShares Tradable European Quality Factor UCITS ETF (PFTQ GY)
PowerShares Tradable European Low Beta Factor UCITS ETF (PFTB GY)
PowerShares Tradable European Price Momentum Factor UCITS ETF (PFTP GY)
PowerShares Tradable European Earnings Momentum Factor UCITS ETF (PFTE GY)
Value stocks are selected by choosing firms that score highly on three traditional measures of value: earnings-to-price ratio, book-to-price ratio, and dividend yield. Quality stocks are those that score highly on three traditional measures of quality: return-on-assets, debt-to-equity ratio, and the cash ratio.
Low-beta stocks are chosen by selecting those firms with the lowest sensitivity to movements in the broad European equity market, as measured by their beta to a broad market benchmark. High price momentum stocks are selected by choosing those with the highest difference between their 12-month and 1-month price returns. Stocks with high earnings momentum are those with the largest percentage change over the preceding three months in consensus analyst earnings estimates for the next two fiscal years.
Once selected, index constituents are ranked and weighted by their three-month average daily trading volume (ADVT). The 15 stocks with the highest three-month ADVT are assigned a weight of 2.5% each; the 15 stocks with the lowest three-month ADVT are assigned a weight of 1.5% each, and the remaining 20 stocks are assigned a weight of 2.0% each.
Chris Mellor, equity product specialist at Invesco PowerShares, commented: “First of all, factors are nothing new. Academics have been researching them for decades to explain stock performance. What’s become evident more recently is the way investors are using them to enhance performance or hedge risk in their portfolios.”
Mellor notes that while each of these factors has outperformed the broad equity market over the longer term, individual performance can vary significantly in the short term. The full suite of single factor ETFs provides investors with the toolkit necessary to tactically adjust their exposure based on their outlook for the factors.
“We expect these new ETFs to attract a variety of investors who want to pursue factors from either a tactical or a strategic perspective,” continued Mellor. “For example, hedge funds are likely to use them in the same way as our sector ETFs, providing them with an easy way to capture or adjust exposure to a specific part of the market for hedging purposes.”
As of 31 October 2017, the strongest performing factor year-to-date has been low beta, returning 22.3%. Earnings momentum is not too far behind, returning 21.4% over the same period. Quality has performed the worst, returning 18.4%.
Other providers to offer European-listed suites of single factor European equity ETFs include the likes of Amundi and BlackRock. Both provide funds tracking single factor indices derived from the MSCI Europe Index.
The ETFs in the BlackRock range have total expense ratios (TERs) of 0.25% and include funds offering exposure to the value, minimum volatility, momentum, quality, and size factors. The largest are the iShares Edge MSCI Europe Value Factor UCITS ETF (IEVL LN) and the iShares Edge MSCI Europe Minimum Volatility UCITS ETF (MVEU LN), with assets under management of €1.4 billion and €1.0bn respectively.
Amundi’s range offers exposure to the high dividend, low size, minimum volatility, and value factors; each fund has a TER of 0.23%. Two other funds in the range provide exposure to the share buyback and growth factors – these are offered with TERs of 0.30% and 0.35% respectively.