ERI Scientific Beta, an affiliate of the EDHEC-Risk Institute, and Fundlogic, the ETF platform of investment bank Morgan Stanley, have partnered to launch five smart beta ETFs on London Stock Exchange.
The newly launched FundLogic ETFs track smart beta indices developed by Scientific Beta.
The ETFs provide equity factor-based exposure to the US, Japan, developed Asia-Pacific ex-Japan, developed Europe, and emerging markets.
The funds’ underlying indices, developed by ERI Scientific Beta, are each composed of six equally weighted sub-portfolios, each of which are designed to capture the long-run factor risk premia that are associated with one of the following factors: value, size (medium capitalisation), low volatility, high momentum, low investment, and high profitability.
A high-factor-exposure (HFE) filter is also applied to each sub-portfolio, targeting the given factor tilt to improve its exposure relative to secondary factor tilts, thus reducing the size of the sub-portfolio from approximately 50% to 30% of the parent index.
To assign their weightings, each sub-portfolio is subjected to five popular weighting schemes (maximum deconcentration, maximum decorrelation, efficient minimum volatility, efficient maximum sharpe ratio, and diversified risk weighted diversification) so as to diversify both firm- and weighting-scheme-specific risks. Each of these weighting schemes are equally weighted to arrive at the final sub-portfolio.
The funds, which are outlined below, each have a total expense ratio of 0.30%.
SciBeta HFE US Equity 6F EW UCITS ETF (USHF)
SciBeta HFE Japan Equity 6F EW UCITS ETF (JHEF)
SciBeta HFE Pacific ex-Japan Equity 6F EW UCITS ETF (PHEF)
SciBeta HFE Europe Equity 6F EW UCITS ETF (EHEF LN)
SciBeta HFE EM Equity 6F EW UCITS ETF (EMHF)
Morgan Stanley’s FundLogic platform already hosts one ETF linked to a SciBeta index, namely the MS Scientific Beta Global Equity Factors UCITS ETF which has more than £200m in assets. It is not, however, the largest SciBeta-linked ETF. The largest is the Amundi Global Equity Multi Smart Allocation Scientific Beta UCITS ETF (SMRT FP) which launched in May 2014 and follows the Scientific Beta Developed Multi-Beta-Multi-Strategy ERC Index. It has some €537 million in assets and has returned 10.5% per annum over the past three years to 1 January 2017, compared to 9.3% returned by the MSCI World Index over the same period.