- Glimpse given into the factor selection process behind the new suite of John Hancock smart-beta ETFs
- Why focusing on smaller stocks and those with lower relative prices may improve a portfolio’s expected return
- In an attempt to capitalize off these factors, John Hancock has come out with six smart-beta ETF options track indices
Smart-beta exchange traded funds that track alternative indexing methodologies help tap into a different way of thinking when it comes to investing, enabling investors to diversify and add value to their portfolios.
For instance, on the recent webcast, Multifactor Investing in a Volatile Market: What’s Your Strategic Beta Plan?, Karen Umland, Head of Investment Strategies Group and Senior Portfolio Manager & Vice President of Dimensional Fund Advisors, explained the factor selection process behind the new suite of John Hancock smart-beta ETFs.
“Academic research supports the hypothesis that prices reflect all available information; however, different stocks have been shown over time to have different expected returns,” Umland said.
Specifically, Umland pointed out that a study conducted by University of Chicago Professor Eugene Fama and Dartmouth College Professor Kenneth French found that focusing on smaller stocks and those with lower relative prices may improve a portfolio’s expected return.
Additionally, in a separate research, University of Rochester Professor Robert Novy-Marx identified profitability as another factor that enhances expected returns.
“A factor-based index should provide a diversified investment solution for clients seeking higher expected returns than conventional benchmarks,” Umland said.
Phil Fontana , Head of Product Development at John Hancock Investments, explained that in an attempt to capitalize off these factors, John Hancock has come out with six smart-beta ETF options track indices developed by Dimensional Fund Advisors, including the John Hancock Multifactor Large Cap ETF (NYSEArca: JHML), John Hancock Multifactor Mid Cap ETF (NYSEArca: JHMM), John Hancock Multifactor Consumer Discretionary ETF (NYSEArca: JHMC), John Hancock Multifactor Financials ETF (NYSEArca: JHMF), John Hancock Multifactor Healthcare ETF (NYSEArca: JHMH) and John Hancock Multifactor Technology ETF (NYSEArca: JHMT).
The smart-beta ETFs select components based on company size where a premium is given on smaller companies over larger companies, relative price where value stocks are selected over growth and profitability where more profitable companies are overweight.
The underlying indices adjust securities by relative price and profitability. The smart-beta indices may overweight stocks with lower relative prices and underweight names with higher relative prices. The index can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability.
Additionally, the underlying index implements market-capitalization adjustments where it increases the weights of smaller companies and decreases the weights of larger names. The weighting methodology suggests that the ETFs may follow a more equal-weight tilt with greater exposure to smaller companies than traditional market-cap weighted index funds.
Financial advisors who are interested in learning more about John Hancock’s smart-beta strategies can listen to the webcast here on demand.