Money managers can find partners in the ETF space to craft creative and potentially investment strategies for investors seeking a more diversified option to access a changing market.

For instance, PIMCO partnered with Research Affiliates in early September to launch its first smart beta index-based equity ETFs, including PIMCO RAFI Dynamic Multi-Factor U.S. Equity ETF (NYSEArca: MFUS), PIMCO RAFI Dynamic Multi-Factor International Equity ETF (NYSEArca: MFDX) and PIMCO RAFI Dynamic Multi-Factor Emerging Markets Equity ETF (NYSEArca: MFEM).

“We’re always looking to find new innovations, meet client demand in this space, and we’ve had a long-standing partnership with Research Affiliates,” Natalie Zahradnik, Executive Vice President and ETF Product Manager at PIMCO, said at the recent Morningstar ETF Conference. “We’ve seen ourselves as the engine of alpha for fixed-income and fixed income active ETFs, but we’ve worked with Research Affiliates and looked to them for outperformance in the equity space.”

The new PIMCO ETFs’ indexing methodologies all include screens for five equity factors, including value, quality, low volatility, momentum and size.

Additionally, Research Affiliates Fundamental Index, like its name implies, is known for its fundamental indexing methodology. The RAFI Dynamic Multi-Factor ETFs will try to underweight the factors that are expensive compared to historical norms and emphasize those that are undervalued, which could create a buy-low, sell-high rules-based discipline. The new PIMCO RAFI ETFs also implements fundamental indexing, which weights stocks by economic size, rather than by market capitalization, skewing holdings toward components already trading at high valuations.

Securities are then determined by selecting companies based on fundamental weight, calculated using four accounting measures from company financial statements: (i) de-levered sales, calculated as company sales averaged over the past five years multiplied by the ratio of average equity to average assets; (ii) cash flow, taken as the company operating cash flow averaged over the past five years; (iii) dividend plus buybacks, calculated using the average dividends paid and share buybacks over the past five years; and (iv) book value, taken as the most recent company book value.

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