Lyxor has launched two new multi-factor smart beta ETFs, the Lyxor FTSE UK Quality Low Vol Dividend UCITS ETF (LON: DOSH) and the Lyxor FTSE US Quality Low Vol Dividend UCITS ETF (LON: DIVO), that give investors exposure to the quality, low volatility and high dividend factors.
Adam Laird, head of ETF strategy, Northern Europe, Lyxor.
Both funds follow indices from the FTSE Qual/Vol/Yield Factor Index family which use a bottom up approach to combining factors. DOSH tracks the FTSE 350 ex Investment Trust Qual/Vol/Tield Factor 5% Capped Total Return Index and DIVO tracks the FTSE USA Qual/Vol/Yield Factor 5% Capped Net Tax Index.
Both the indices are constructed using the same methodology. Stocks from the relevant parent index are assigned factor scores for quality (profitability, efficiency, earnings quality and leverage), low volatility (standard deviation of weekly returns for the past five years), and income (12-month trailing dividend yield). Individual factor scores are combined to produce a composite factor score for each stock, which is then multiplied by market capitalisation weights to give final index weights.
Adam Laird, head of ETF strategy, Northern Europe, Lyxor, commented: “Income and ETFs haven’t always gone together – investors have a tendency to think of passive investing as a growth strategy. But actually it makes a lot of sense for income portfolios too.
“Our new launches look at three factors when selecting shares. First, it selects shares on basis of yield – screening out growth focused companies. We screen by quality, which helps avoid the “yield trap” or selecting junk just because it has a high return. Finally, the low volatility screen helps filter out highly volatile stocks. Not only does this help smooth out returns, but it can also improve performance through the low volatility risk factor, a well-documented phenomenon in financial academia.”
The indices then go through a process known as “narrowing” whereby stocks are removed one at a time from the index, starting with the stock with the lowest composite factor score, in order to concentrate factor exposure. Constituents are removed until constraints regarding capacity and level of diversification are reached. Maximum individual weights are set at 5%, and sector weights are constrained to +/-20% relative to weights in the parent universe.
The UK version has a portfolio of 112 stocks and a current yield of 3.63%, whilst the US versions holds 150 stocks and yields 2.94% (data as of the end of May 2017).
Each fund has a total expense ratio (TER) of 0.19%, pricing the funds as some of the lowest cost income-based ETF strategies available in Europe.
“Particularly in this environment of low yields, the lower charges on ETFs mean more of the dividend goes to the investor,” said Laird.
Francois Millet, head of product line management – ETFs & indexing at Lyxor, added: “Investors shouldn’t have to compromise quality for yield, or over pay for their equity income. With a TER of just 0.19% these are the cheapest quality income Smart Beta ETF in Europe.”
According to Lyxor, high dividend ETF strategies have amassed more than €16bn as Europe’s investors have sought new ways to capture yield, and more than ninety percent of this has gone to smart beta strategies.
Both the funds trade in sterling and DIVO is also listed on the London Stock Exchange in US dollars with the ticker code BUCK.