Invesco Powershares has launched a smart beta factor strategy ETF, based on S&P 500 constituents, on the London Stock Exchange. The PowerShares S&P 500 QVM UCITS ETF (LON: PQVM), which will also list on other European exchanges, employs a multi-factor approach using quality, value and momentum to allocate to companies from the S&P 500.

Nicholas Samaran, head of product development, EMEA, PowerShares.

Nicholas Samaran, head of product development, EMEA, PowerShares, commented: “As the largest single economy in the world, the US may represent a significant portion of investors portfolios. However, in the last few years, research shows that it has been challenging to find sustainable outperformance and this is why a number of investors have been looking at finding a more refined range of solutions.

“Navigating between factors successfully can be difficult as single factors are cyclical in nature. Therefore, we have identified a market need for a strategy that combines factors and seeks to remove the risk associated with timing. A multi-factor methodology helps focus on specific factors but avoids the potential challenges of choosing and timing factors, without necessarily missing the upside that the best factor choice may have provided.”

The ETF tracks the S&P 500 Quality, Value and Momentum Multi-factor Net Total Return Index. To determine the components of the index, all companies in the S&P 500 are given scores based on their performance against these three factors. These scores are then combined on an equal weight basis into a final composite factor score. The 100 companies with the highest composite score are then included in the index, subject to a buffer rule which aims to reduce turnover.

The weight of each component in the index ranges between 0.05% and the lessor of 5.0% of the index of 20 times its market capitalisation weight. The weight of each sector is capped at 40%.

The largest sectors in the index are financials (23%), consumer staples (17%), industrials (17%) and information technology (15%). The largest constituents in the index are JP Morgan Chase, Procter and Gamble, and Berkshire Hathaway.

Vinit Srivastava, head of strategy indices at S&P Dow Jones Indices, said: “Multi-factor indices are designed to provide stable excess returns without requiring a view on a specific factor. Furthermore, selecting stocks based on our multi-factor score approach aims to improve the factor exposure compared with combining single-factors at the index level. By using a combination of factors that have a low correlation between each other, the S&P 500 Quality, Value & Momentum Multi-factor Index seeks to provide diversification benefit within an index strategy.”

In back testing, the index returned 7.6% per annum over the last 10 years compared to the 6.5% returned by the S&P 500. The dividend yield of the fund is 2.34 compared to 2.03 for the S&P 500. The index is more concentrated than the S&P 500, with the top 10 constituents making up 43% of the weight compared to just 19% for the S&P 500.

The ongoing charge is 0.35% and dividends are distributed every quarter.