Alternative Avenues to Alternatively-Weighted ETFs

Smart or strategic beta exchange trade funds possess a name (or marketing phrase) that has been almost universally derided, but even the naysayers have to admit these ETFs have been prolific asset gatherers.

A mere $195 billion was allocated to alternatively-weighted ETFs in 2012, but that number is now up to $402 billion across nearly 480 products, reports InvestmentNews, citing Morningstar data.

Within the universe of strategic beta ETFs, there are myriad ways of constructing these funds, meaning there is more to the evaluation process than simply knowing the ETF in question is not cap-weighted. Still, one of the primary drivers of strategic beta asset growth in recent years has been dividend ETFs. With dividend growth on the rise, investors poured over $10 billion into dividend ETFs last year, once again making payout funds the primary drivers of asset growth for strategic beta ETFs. [Smart Beta ETFs Keep Winning]

One example of rapidly growing dividend ETF is the FlexShares International Quality Dividend Index Fund (NYSEArca: IQDF), which added $283 million of $317.1 million in assets under management last year.

“This equity-income oriented ETF adds a proprietary “quality” screen and provides investors with different exposure than a market-cap weighted international ETF such as iShares Core MSCI EAFE (NYSEArca: IEFA),” said S&P Capital IQ in a new research note. “For example from a sector perspective, exposure to financials (33% of assets vs. 26% for IEFA) is higher, while to consumer discretionary (10% vs. 13%) is lower. Meanwhile, IQDF has less exposure Japan and the United Kingdom than IEFA and approximately one-quarter of its assets are in emerging markets such as China and Taiwan.”

IQDF, which S&P Capital rates overweight, the performance of the Northern Trust International Quality Dividend Index, which is comprised of developed ex-U.S. and emerging market securities screened to maximize “quality,” target a beta similar to the parent index and improve on the parent index’s dividend yield. [Don’t Forget These Smart Beta ETFs]

IQDF has a trailing 12-month yield of 4.27%. The ETF’s combined 25% weight to the U.K. and Australia is notable because those are two of the best dividend growth markets among developed countries outside of the U.S.

Among alternatively-weighted ETFs with a focus on U.S. large-caps, is the $138.8 million PowerShares Fundamental Pure Large Growth Portfolio (NYSEArca: PXLG), an ETF that is nearly five years old.