Even though PowerShares S&P 500 Low Volatility (SPLV) was also rebalanced in November as part of its own quarterly reconstitution, the sector exposure and stocks inside this peer product are distinct due to a differentiated approach. For example, industrials represented a higher 17% of assets, while technology and health care were lower at 11% and 6%, respectively. Not surprisingly, there are USMV constituents not found in SPLV, including BDX and FB, as well as SPLV holdings that are not a part of USMV, such as Illinois Tool Works (ITW) and Stanley Black & Decker (SWK). Meanwhile, SPLV has more exposure to the defensive utilities sector (22%). This serves as a reminder that similarly-sounding ETFs can offer different portfolios.
While technology exposure in the low volatility USMV was maintained, in iShares Edge MSCI USA Momentum (MTUM) the stake went up 470 basis points following the index reconstitution. The MSCI index behind MTUM does not have any sector constraints and is based on risk-adjusted performance over the past six and 12 months. As such, technology stocks with strong momentum traits, such MasterCard (MA), PayPal Holdings (PYPL) and Visa all joined MTUM with sizable weightings. Combined with Apple (AAPL), Microsoft (MSFT) and other tech stocks, the sector weighting was 38% of assets as of December. Non-tech stocks added to MTUM in November included Abbott Labs and Abbvie (ABBV).
Whether a more risk-off or a risk-on approach is preferred is up to each investor, but CFRA sees smart-beta products gaining traction. Yet, understanding an ETF’s performance record or its ability to replicate a unique index does not help investors determine what will happen in 2018. Only a review of the holdings can provide that. CFRA ETF reports offer our proprietary ETF ratings, as well as tools to help with the due diligence.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.
Register CFRA’s complimentary webcast, “Outlook 2018: Midterm Misfire?” – Thursday, December 14, 2017 at 11 am EST, here.