Just a day shy of its first anniversary, it is fair to say the iShares MSCI USA Size Factor ETF (NYSEArca: SIZE) is off to a solid start.
Part of a suite of factor-based ETFs developed at the request of the Arizona State Retirement System, SIZE consists of traditional U.S. large and mid-cap stocks, but it reweights the holdings based on a rules-based methodology that leans toward stocks with smaller average market-cap and lower-volatility. [iShares Launches Factor ETFs]
Although SIZE tilts toward the smaller market cap names in its selection universe, the ETF’s 612 holdings are mostly of the large-cap varietal. Top-10 holdings include Johnson & Johnson (NYSE: JNJ), PepsiCo (NYSE: PEP) and General Mills (NYSE: GIS), indicating a value/low volatility bias that is advantageous at time when investors are eschewing growth and momentum ETFs in favor of value funds. [Value ETFs Back in Style]
Since one of SIZE’s primary objectives is to present investors with a low-risk alternative to traditional cap-weighted broad market funds, how the ETF mutes risk is an important factor. The MSCI USA Risk Weighted Index reweights each security in the parent index with the smaller market value, lower risk names taking on more prominent positions.
Risk weightings are calculated using the inverse of the historical variance of the stocks based on three years of weekly return data, according to iShares, allowing SIZE to emphasize the size and value factors. Those are oft-cited attributes of the out-performance offered by some smart beta ETFs.
Although SIZE seeks to damp risk and volatility, that does not mean the fund is boring at the sector level. At the end of 2013, the ETF’s second-largest sector weight was consumer discretionary at almost 13%, which has been a drag on the fund this year. SIZE is also light on energy stocks with a weight of less than 5%, though that is likely the result of size, not value because that sector has recently been lifted due in part to low valuations. [Value Allure With Energy ETFs]