FlexShares' U.S. Equity ETFs Outperform Over 1-Month Period

U.S. equities rebounded in July, driven by better-than-expected earnings and anticipation of a potential slowing in the pace of future rate hikes by the Fed. 

The funds in FlexShares’ suite of ETFs that invest in U.S.-domiciled companies offered investors particularly strong returns during the past month, with the FlexShares STOXX US ESG Select Index Fund (ESG), the FlexShares Morningstar US Market Factor Tilt Index Fund (TILT), the FlexShares US Quality Large Cap Index Fund (QLC), and the FlexShares US Quality Large Cap Index Fund (FEUS) leading the pack.

Over a one-month period, ESG, TILT, QLC, and FEUS returned 7.9%, 7.4%, 6.7%, and 6.6%, respectively, according to VettaFi. The funds each recouped some of their losses from earlier in the year and, year-to-date, ESG, TILT, QLC, and FEUS are now down 15.3%, 13%, 12.9%, and 14.4%, respectively. 

ESG tracks a proprietary STOXX index that rates companies based on environmental, social, and governance factors that influence risk and return, such as workplace safety, executive compensation, and board diversity. The portfolio is weighted in favor of the best performers, according to VettaFi.

TILT offers broad-based exposure to the U.S. equity market, but is unique in a few ways from the other funds in the All Cap Equities ETF Database category. Instead of simply weighting by market capitalization, the fund tilts exposure towards the small-cap and value segments of the U.S. market by giving these companies slightly higher weightings than they would receive in a simple cap-weighted methodology. The result is a portfolio that has significant overlap with products linked to popular indexes such as the Russell 3000, but with a unique makeup, according to VettaFi. 

For investors with conviction in small-cap and value companies maintaining greater long-term potential, TILT can be a unique way to achieve instant, cheap exposure to a strategy that might otherwise be difficult and expensive to maintain, according to VettaFi.

QLC is part of FlexShares’ stable of factor ETFs. The fund tracks an index of large-cap U.S. companies that scores companies based on quality metrics like profitability, management efficiency, and cash flow. The methodology weeds out the lowest-scoring companies, according to VettaFi. Top holdings include familiar blue-chip companies like Apple, Microsoft, and Johnson & Johnson.

FEUS, which launched last September, follows an index designed to provide a broad exposure to U.S. companies that exhibit several specific environmental, social, and corporate governance attributes. Selection begins with the constituents of the Northern Trust 600 Index, an index composed of the 600 largest companies in the U.S. equity space, then each eligible company is ranked based on their ESG scores as measured by their ability to manage risks associated with material ESG issues and their good corporate governance, according to VettaFi. 

FEUS also utilizes carbon-related risk metrics to assess the carbon emissions intensity, carbon reserves, and carbon risk exposure for each firm. Companies are also screened and excluded based on business activities that produce negative impacts in the environment. Additional optimization is also done to minimize systematic risk including constituent, liquidity, absolute weight, sector, industry group, and turnover constraints, according to VettaFi.

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