WisdomTree has launched the WisdomTree US Multifactor UCITS ETF on London Stock Exchange. The smart beta fund tracks a proprietary in-house index that provides exposure to large and mid-cap US equities selected using a multifactor methodology.
Christopher Gannatti, WisdomTree head of research in Europe.
The underlying reference for the ETF is the WisdomTree US Multifactor Index which applies its methodology to a starting universe of the top 800 US-listed stocks by market capitalisation.
These stocks are then assigned scores for two fundamental factors (value and quality) and two technical factors (momentum and low correlation). Stocks are assigned a composite factor score based on these four factors.
The 200 companies with the highest composite factors scores are included in the index and weighted by a combination of their composite factor score and trailing 12-month volatility, rewarding less volatile stocks with a greater weight in the index. The index is rebalanced quarterly and the maximum weight for an individual security is capped at 4%.
In addition, the index prevents unwanted sector bets by enforcing sector neutrality versus the parent index. The largest sectors in the index are currently information technology (25.8%), financials (14.3%), health care (14.2%), consumer discretionary (13.2%), and industrials (9.4%). The index is well diversified with the largest constituent – Jack Henry & Associates – having a weight of just 1.4%.
The ETF has been listed with a distributing share class (USMF LN) and an accumulating share class (FCTR LN), both of which trade in US dollars. It has a total expense ratio (TER) of 0.30%.
Rafi Aviav, WisdomTree head of product development in Europe, commented, “While there is room for multifactor strategies that offer a near-market experience and try to keep a very low tracking error with respect to their benchmark, USMF takes a different approach. It packages a high active share portfolio with significant factor exposures that are well balanced across the leading equity risk factors. Our high active share is achieved despite the strategy’s sector-neutrality, which ensures excess returns are consistently and purely driven by the strategy’s stock selection.
“Furthermore, the factor exposures are pronounced and well-balanced across the leading risk factors, as opposed to many offerings which overload on value or momentum or have faint exposures across all factors. This all combines to makes the strategy’s added value potent, transparent and fee-efficient.”
With the availability of an ever-greater amount of smart beta strategies, investors today can access individual factors associated with historical market-beating performance at fairly low cost. However, while it is now much easier to pick and choose factor exposures, timing which factor might perform strongly ahead of time is still a complicated affair.
The benefit of multifactor strategies lies in diversifying factor exposures so that the risk of being fully in the worst-performing factor at a point in time is mitigated.
[pullquote]“For those clients who don’t believe that they can add value by timing factors and don’t want to risk being overweight in the wrong factor at the wrong time, this provides a potential solution.”
– Christopher Gannatti, WisdomTree head of research in Europe[/pullquote]Christopher Gannatti, WisdomTree head of research in Europe, said, “Diversification is about minimising the risk of severe underperformance over a given time period. Many investors in US equities have watched the outperformance of momentum-focused strategies in the past few years. Instead of requiring them to decide if they want to chase this strategy or try to select the next factor poised for outperformance, WisdomTree’s multi-factor approach ensures some exposure to momentum while also diversifying across other factors which may outperform in the coming periods.
“For those clients who don’t believe that they can add value by timing factors and don’t want to risk being overweight in the wrong factor at the wrong time, this provides a potential solution.”
There are a number of multifactor ETFs targeting US equities already available in Europe – the largest of which are provided by UBS, BlackRock, and Invesco.
The UBS ETF MSCI USA Select Factor Mix UCITS ETF (USFM LN) tracks the MSCI USA Select Factor Mix Index which is constructed using a combination of six factor indices, representing the performance of momentum, value, quality, shareholder yield, volatility, and size risk premia. It has approximately $850m in AUM and a TER of 0.30%.
The iShares Edge MSCI USA Multifactor UCITS ETF (IFSU LN) tracks the MSCI USA Diversified Multiple-Factor Index which maximizes exposure to four factors – value, momentum, quality and low size – while maintaining a risk profile similar to that of the MSCI USA Index. It has approximately $130m in AUM and a TER of 0.35%.
The Invesco FTSE RAFI US 1000 UCITS ETF (PRUS LN) tracks the FTSE RAFI US 1000 Net Total Return Index which weights its constituents using a composite of four fundamental factors – sales, cash flow, book value, and dividends. It has approximately $330m in AUM and a TER of 0.39%.
WisdomTree’s US multifactor strategy is also available in the US (USMF US), having launched on Cboe BZX in July 2017. It has assets under management of $10 million, and an expense ratio of 0.28%.