Innovation and new players jumping over from the traditional mutual fund space have quickly helped the ETF universe expand to where it is now today.
“It’s just the expansion of ETFs, number of types of ETFs,” Ed Rosenberg, Senior Vice President and Head of ETFs at American Century, said at the 2018 Morningstar Investment Conference. “They’re getting more and more similar to what usual funds do. As soon as non-transparent active comes into play, then you have every set of structure in a sense of ETFs that what mutual funds can do today.”
American Century was also among the latest group of money managers that turned into ETF providers. American Century Investments branched away from its six-decade history of managing traditional open-end mutual funds after launching the American Century STOXX U.S. Quality Value ETF (NYSEArca: VALQ) and American Century Diversified Corporate Bond ETF (NYSEArca: KORP).
While not actively managed, the STOXX U.S. Quality Value ETF incorporates a smart beta strategy reminiscent of actively managed investments and tries to reflect the performance of the iSTOXX American Century USA Quality Value Index, which is made up of 900 largest publicly traded U.S. equity securities screened and weighted by fundamental measures of quality, value and income.
The quality factor screens out the bottom companies based on profitability, earnings quality, management quality and earnings estimate revisions. The valuation score is calculated by the attractiveness of each stock relative to peers in the same industry group based on value, earnings yield and cash flow yield metrics. Lastly, income sustainability is based on dividend growth and dividend coverage applied to eliminate the bottom of the universe of dividend-paying stocks, along with an income score based on dividend-yield computed for the remaining stocks.
The Diversified Corporate Bond ETF, though, is actively managed. The fund invests in U.S. dollar-denominated corporate debt securities issued by U.S. and foreign entities, but may also hold securities issued by supranational entities. Additionally, up to 35% of the fund’s net assets may be invested in high-yield securities or junk bonds. The fund may also invest in derivative instruments such as futures contracts and swap agreements. The weighted average duration of the fund’s portfolio is expected to be between three and seven years.
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