Smart-beta ETFs have taken many different shapes and forms since their introduction to the market. Using alternative indexes to capture exposure to factors like value, momentum, quality, volatility, and size has greatly expanded investors’ options. But these approaches are just the beginning of the smart beta revolution. As the products and issuers have become more innovative and adaptive to investor demand we have begun seeing the next level of strategic beta products. Products that seek to capture exposure to all of the major identified equity factors.
Up until this point we have seen ETF investors strive to get exposure to these fundamental factors by pairing complimentary ETFs. A few newer smart-beta products have even taken the process further by weighting factors like value and momentum 50/50. Two brand names in the space have teamed up to launch a product that aims to follow companies that excel in not just one or two factors – but many.
Deutsche Asset and Wealth Management, DeAWM, has launched the Deutsche X-trackers Russell 1000 Enhanced Beta ETF (NYSEArca: DEUS) and Deutsche X-trackers FTSE Developed ex US Enhanced Beta ETF (NYSEArca: DEEF).
The two new smart-beta ETFs track FTSE Russel Comprehensive Factor Indexes that target five factors that academic research has identified as important in explaining a stock’s risk and performance. DEUS tries to reflect the performance of the Russell 1000 Comprehensive Factor Index while DEEF follows the FTSE Developed ex US Comprehensive Factor Index.
Specifically, the two underlying multi-factor benchmarks weight stocks based on the five academically-proven characteristics, including value, quality, momentum, volatility and size.
“Emphasizing these characteristics, or factors, can potentially produce a significant contribution to outperforming traditional market cap-weighted indices,” Arne Noack, Director of Exchange Traded Product Development at Deutsche Asset & Wealth Management, told ETF Trends.
Ron Bundy, CEO of North America Benchmarks for FTSE Russell added, “Multi-factor indexes have become increasingly popular as important diversification tools. Our new FTSE Russell Comprehensive Factor Indexes draw on the unique expertise of our extensive FTSE Russell global index research team, combining multiple factors in a transparent way to help investors meet their unique objectives, we are excited to align with Deutsche AWM’s ETFs to offer indexes as the basis for their new ETFs.”
The value factor refers to undervalued stocks relative to accounting values by measuring cash-flow yield, earnings yield and sales-to-price of each company. Relatively cheaper stocks are thought to outperform more expensive equities over the long-term.
Quality focuses on high-quality companies by measuring profitability, efficiency, earnings quality and leverage. The quality of a company’s earnings are thought to be a better gauge of future earnings performance.
Momentum gauge singles out recent price movements-over-time as a potential indicator of future performance.
The volatility factor identifies stocks with relatively low volatility by measuring the standard deviation of five years of weekly, total local returns on each stock. Many studies have shown that portfolios with less volatility or low beta offer a combination of higerh-than-average return and smaller drawdowns.
Lastly, the size factor considers market capitalization as an indicator of performance, with small-cap stocks historically outperforming large-caps.
The comprehensive multi-factor weighting methodology may provide better risk-adjusted returns, allowing investors to capture broad market moves while limit potential downside risks.
Fiona Bassett, DeAWM’s Head of Passive Asset Management, told ETF Trends “The Deutsche Bank, FTSE Russell smart-beta partnership is a result of demand from our clients. Advisors are now increasingly using wisely constructed smart-beta strategies as a core portfolio component.”
The new ETFs also come with competitive prices as a way to stand out in a growing field of smart-beta offerings. DEUS has a 0.25% expense ratio and DEEF has a 0.35% expense ratio.