There is beta and there is smart beta. Those are the known betas, but there is also scientific beta. Essentially an avenue for capturing the benefits of multiple investment factors in a single vehicle, scientific beta can be applied to a variety of equity groups.
The ETFS Diversified-Factor Developed Europe Index Fund (NYSEArca: SBEU) is an avenue worth considering for the investor looking for multi-factor exposure to developed Europe equities. With the recent launch of new scientific beta ETFs, it should be noted that SBEU and its U.S. counterpart, the ETFS Diversified-Factor U.S. Large Cap Index Fund (NYSEArca: SBUS), were among the first scientific beta ETFs to list in the U.S. [New ETFs Get Scientific With Beta]
In many cases, smart beta ETFs isolate a single investment factor, such as low volatility, size or value. Multi-factor ETFs, such as SBEU, improve on that concept. Remember, the goal of factor-based investing is to deliver superior risk-adjusted returns.
SBEU benchmarks to Scientific Beta Developed Europe Multi-Beta Multi-Strategy Equal Weight Index, which “is composed of the 700 largest and most liquid stocks listed in the following countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom,” according to ETF Securities.
The pillars of that index are low volatility, momentum, size and value. “The index uses a proprietary weighting strategy to provide well diversified exposure, by combining 5 models: Maximum Deconcentration, Maximum Decorrelation, Efficient Minimum Volatility, Efficient Maximum Sharpe Ratio, and Diversified Risk Weighted,” according to ETF Securities.
There are advantages to embracing a multi-factor. Said another way, momentum can be style one year while low volatility shines the next year. That was the case in 2013 and 2014 when momentum went from best to worst among the four factors while low volatility went from worst to first. SBEU helps alleviate the burden of single factor isolation. [Smart Beta Boom]
DBEU allocates nearly 31% of its weight to U.K. stocks, which is not a bad place to be with the FTSE 100 resting near all-time highs. In 2014, U.K. firms once again offered excellent dividend growth. Payouts there surged 31% to $135 billion, according to Henderson Global Investors.
Germany an France, the Eurozone’s two largest economies, combine for 23.6% of SBEU’s weight. The new ETF, which charges 0.4% per year, has gained 6.4% since coming to market at the end of January. [ETF Securities Continues Equity ETF Expansion]
ETFS Diversified-Factor Developed Europe Index Fund
