iShares, a leading exchange-traded fund provider and division of BlackRock, has unveiled a new suite of multi-factor smart beta ETFs, branded as “FactorSelect”, offering regional equity exposure to a combination of factors that have historically added value over the long term.

Tom Fekete, Head of EMEA Product, iShares at BlackRock.

The new suite has been launched with three products initially: the MSCI World UCITS ETF (IFSW LN), the MSCI USA UCITS ETF (IFSU LN) and the MSCI Europe UCITS ETF (IFSE LN). Additional regional and country exposures are likely to follow.

The ETFs track the MSCI Diversified Multiple-Factor Indices, which have been constructed to provide exposure to four investment factors: value, quality, momentum and size. This is complemented with a diversification technique designed to maintain a similar level of risk to the broader equity market, as represented by their respective parent index.

“Research has shown that certain investment styles have, over time, provided a higher risk-adjusted return than the overall market. These themes are well understood by investors – seeking high quality balance sheets or inexpensive stocks, for example – and have long been a staple of active mutual fund strategies. The FactorSelect series now allows investors to access these intuitive and time-tested investment ideas through low-cost, transparent ETFs,” said Tom Fekete, Head of EMEA Product, iShares at BlackRock.

Multi-factor ETFs are the latest development in smart beta investing and take advantage of the low historical correlations between factors to reduce overall volatility. “These new multi-factor ETFs provide exposure to multiple sources of potential excess returns in a single fund, resulting in a diversified strategy that may perform well in different market conditions. Investors could consider these smart beta ETFs as a complement to traditional index and active strategies, to potentially enhance diversification and improve returns,” continued Fekete.

Deborah Yang, Managing Director, Head of Index, EMEA, at MSCI, added: “We are delighted that iShares is expanding its factor ETF range using MSCI indexes. Multi-factor exposure is a significant and growing development in indexing, and are increasingly used by investors who want more diversification in a transparent, cost-effective way.”

The MSCI indices use a methodology which scores each constituent of the parent index on indicators of value (using ratios of price to fundamental value), quality (based on high percentage of company earnings allocated to shareholders, low levels of debt and low earnings variability), momentum (based on share price outperformance of recent periods) and size (favouring lower market capitalisation companies).

Obtaining exposure to these factors can potential lead to levels of portfolio risk which may not be tolerated by some investors. To counteract this, MSCI use an optimisation technique to maximize the factor exposures while looking to keep total risk in line with that of the market.

The funds are listed on the London Stock Exchange and have total expense ratios ranging from 0.35% – 0.50% per annum.