Being Different From Index ETFs Can Add Value

What’s inside an ETF really matters. This is an argument I’ve been making for more than a decade.  However, with the growth of alternatively weighted index ETFs and actively managed products, this has become even more notable. 

Advisors continue to tell VettaFi that they are concerned about the long-term prospects for equities. During a webcast last week with Innovator ETFs, 63% of respondents said that they expect an annualized return for their equity allocation to be between 5%-10%, with just 29% expecting double-digit returns. The iShares Russell 1000 ETF (IWB) was up 17% year to date as of September 15. 

VettaFi is hosting an Equity Symposium on September 21, starting at 11 a.m. ET inclusive of two hours of continuing education credit. At 12:45 p.m. ET, I’m moderating a discussion with Columbia Threadneedle and Capital Group. Other sessions will focus on large-caps, mid-caps, and sector strategies. 

What You Own and Don’t Own Matters 

The Columbia Research Enhanced Core ETF (RECS) invests in Russell 1000 stocks rated favorably by the firm’s quantitative investment models. The goal is to eliminate the unattractive stocks by focusing on high-quality, undervalued companies with a catalyst. RECS owns just 374 companies and does not have positions in some mega-caps like Berkshire Hathaway and Tesla, according to VettaFi Research. It owns Apple and Microsoft though. 

RECS has a low 0.15% expense ratio. On a three-year annualized basis, RECS rose 12.5%, compared with 10.6% for IWB. 

Emerging Markets Exposure Without China 

The Columbia EM Core ex-China ETF (XCEM) is the second fund from Columbia Threadneedle that excludes stocks normally found in a broad index. While RECS is focused on valuation, XCEM simply does not own Chinese stocks, unlike peers that have 25% of assets dedicated to the market. This is broad emerging markets strategy focused on India, South Korea, and other major emerging markets.  

XCEM charges a modest 0.16% expense ratio. On a three-year annualized basis, XCEM was up 6.7%, outperforming the iShares Core MSCI Emerging Markets ETF (IEMG), which lost 0.3%. 

There’s Value in Active Management Too 

Meanwhile, there’s a wide array of actively managed equity ETFs. Firms like Capital Group have brought moderately-priced active approaches to meet advisors in the ETF industry. 

The Capital Group Dividend Value ETF (CGDV) focuses on attractively valued dividend-paying stocks. The top 10 holdings in mid-September included Microsoft but also Abbott Laboratories, General Electric, and Phillip Morris International. While some actively managed equity ETFs can only own U.S. stocks, CGDV’s best ideas include British American Tobacco and Linde.  

CGDV’s 0.33% expense ratio is low for an active ETF. The ETF launched in February 2022, and in the past year was up 24%, ahead of IWB’s 15% gain. 

Being different from the broad benchmark can indeed add value for advisors. I encourage you to come learn more about these ETFs during Thursday’s symposiumEquity Symposium. There’s still time to register. 

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