Six of the best Smart Beta ETFs
Smart Beta ETFs now account for more than $600 billion of global ETF assets, and offer good diversification from a simple market cap approach. Here we outline six of our favourites.
Investors are now spoilt for choice in the Smart Beta space, with product innovation continuing to come on in leaps and bounds. Where once investors only had the choice between value or growth strategies, the modern day exchange traded fund (ETF) investor has access to new areas of research which just a few years ago would have been sold and priced as ‘actively managed’ investments.
In a previous article we outlined some of the different Smart Beta styles, and highlighted at which stages of the market cycle they might perform best. In this we analyse six different Smart Beta ETFs, with which investors may want to make their first foray into this interesting space.
Use our ETF screener to research the right ETFs for you. All the ETFs described below can be bought on IG’s share dealing platform, where commissions start at just £5 and there are no custody or platform fees.
iShares Edge MSCI World Momentum Factor UCITS ETF (IWFM)
Momentum strategies are the bane of the fundamental analyst. What could be more foolish a plan than buying stocks just because they have gone up in price - surely they become overvalued? This strategy buys stocks based on their 6 month and 12 month returns, re-balancing twice a year. It can have high turnover (which impacts returns in the long run), but performance has been very strong, outperforming a market cap index by 20% over the three years to the end of October 2017.
The iShares ETF charges 0.3% and has assets under management of around one billion USD.
SPDR MSCI USA Value Weighted UCITS ETF (UVAL)
Value as a strategy has been hugely overshadowed by growth stocks – notably technology – to the extent that value managers have been publically quoted asking whether value as a strategy ‘works anymore’? While value is certainly getting cheaper to relative to growth, the cycle will turn eventually and it seems premature to totally write off a long-established method of investing.
The SPDR ETF gives a less concentrated exposure to US value stocks, compared to other ETF offerings, but with better stock diversification, and has a total expense ratio of just 0.25%.
SPDR S&P Global Dividend Aristocrats UCITS ETF (GBDV)
With taxes on income now higher than capital gains tax, dividend strategies can be tax inefficient when held outside SIPPs and ISAs. However many investors still swear by them, as they are one accounting metric that is impossible to manipulate.
This ETF that only invests in stocks that have increased their dividend for at least 10 years, and yields 3.4%. The country allocation is significantly different to market cap weights, with the US (20.2%), UK (12.2%) and Canada (17.1%) making up the top three.
iShares Edge MSCI World Minimum Volatility UVITS ETF (MVOL)
Minimum volatility ETFs have attracted a lot of assets in recent years and pick stocks that in aggregate have lower volatility than a market cap index due to being less correlated to each other. This ETF has performed to expectations, with three year volatility of 8.5%, compared with a market cap benchmark volatility of 11.4%.
It has also performed very well, though some critics take a view that the underlying stocks are pricing above fair value on a historic basis. It has substantial weights to the US and Japan and a Total Expense Ratio of 0.3%
Lyxor FTSE Emerging Minimum Variance UCITS ETF (MVMX)
Continuing the minimum volatility theme, this emerging markets ETF offers some diversification from a market cap ETF, which would have 57% exposure to China, Korea and Taiwan. For investors wanting exposure to this area, the competing iShares Edge MSCI EM Minimum Volatility ETF (EMV) is worth a look.
The Lyxor ETFs largest exposure is to China (17%), with India (15.9%), Taiwan (11.5%), Thailand (8.8%) and Malaysia (6.9%) making up the five largest countries. It has a total expense ratio of 0.4%
Db X-trackers FTSE equal weight UCITS (XFEW)
The FTSE 100 has significantly underperformed the FTSE 250 over time, largely because the performance of the mega caps has been poor compared with smaller companies that arguably find it easier to grow.
This ETF reduces individual company risk by investing equally across all the stocks in the index at a 1% weight. The index is re-balanced every six months, which avoids over-trading. It has a total expense ratio of 0.25% and assets under management of £22.6 million, which, while growing, may make it a little small for some investors.