PIMCO has partnered up with Research Affiliates to launch its first smart beta index-based equity exchange traded funds.
On Wednesday, PIMCO rolled out the 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). MFEM has a 0.49%, MFXD has a 0.39% expense ratio and MFUS comes with a 0.29 expense ratio.
“PIMCO is excited to partner with Research Affiliates in offering the PIMCO RAFI Dynamic Multi-Factor Equity ETFs,” Andrew Pyne, Executive Vice President and strategist focused on PIMCO’s equity solutions, said in a note. “These ETFs help investors overcome the challenge of determining which factors to include and at what weighting. By dynamically adjusting factor allocations in an ever-changing market, PIMCO RAFI Dynamic Multi-Factor Equity ETFs offer a compelling solution for clients navigating an increasingly disparate smart beta and factor landscape.”
The new PIMCO ETFs’ indexing methodologies will 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.
Specifically, according to a prospectus sheet, 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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Furthermore, the dynamic aspect starts with an equal weighting to each factor plus an additional weight based on a calculation of a factor’s standard momentum and long-term reversal signal relative to other factors. The additional weights to a specific factor are capped at a max of 15% and a minimum of -15% relative to the equal weights.
The methodology also creates factor portfolios focused on an individual factor other than momentum. These factor based sugroups are reconstituted in four so-called tranches with each tranche reconstituted in each quarter. The staggered rebalancing is intended to diversify risk.
“The new PIMCO RAFI Dynamic Multi-Factor ETFs marry multi-factor investing with a true smart beta strategy, Fundamental Index, thereby providing two alpha engines in a single package,” Rob Arnott, Chairman and Chief Executive Officer of Research Affiliates, said in a note.
For more information on new fund products, visit our new ETFs category.