iShares has launched four exchange traded funds (ETFs) based on world equity indices and constructed according to value, size, quality and momentum - factors which have historically provided enhanced risk-adjusted returns. These sources of return cannot be isolated through traditional market capitalisation weighted indices, and iShares says the funds can be used to express factor views throughout the business cycle.
"If you buy a traditional index tracking fund or ETF you could be overweight expensive stocks and underweight cheap stocks," says Peter Sleep, senior portfolio manager at Seven Investment Management. "Research has shown that buying cheap value stocks, small stocks, stocks that have momentum (are going up) or high quality stocks can outperform traditional market cap indices by 1 to 2 per cent a year over time.
"But there can be prolonged periods of underperformance and factor investing can also be quite volatile: for instance, momentum strategies can turn against you quite savagely in a downturn."
The new products: iShares MSCI World Value Factor UCITS ETF (IWFV), iShares MSCI World Size Factor UCITS ETF (IWFS), iShares MSCI World Momentum Factor UCITS ETF (IWFM) and iShares MSCI World Quality Factor UCITS ETF (IWFQ), all use physical replication - they buy shares in the indices they track - and have total expense ratios of 0.3 per cent.
iShares says the funds can be used as part of a broad portfolio to diversify risk or used as niche exposures to boost performance.
The funds are the latest additions to the trend for so-called 'smart beta' ETFs to be listed on the London Stock Exchange. These smart beta funds are typically based on an index which follows a defined set of rules.
Read more about smart beta ETFs
db X-trackers' range, for example, includes the Equity Low Beta Factor UCITS (XDEB), Equity Momentum Factor UCITS (XDEM), Equity Quality Factor UCITS (XDEQ) and Equity Value Factor UCITS (XDEV) ETFs. The funds have an all in fee of 0.25 per cent and use physical replication.
Powershares meanwhile, offers several smart beta ETFs including Powershares FTSE RAFI All World 3000 UCITS ETF (PSRW) which we count among our IC Top 50 ETFs. The fund tracks the performance of global equities based on the following four fundamental measures of company size: book value, cash flow, sales and dividends. The index the ETF tracks is composed of the 3,000 equities with the highest fundamental strength based on the composite four factor approach, and they are weighted by their fundamental scores. It uses physical replication and has an ongoing charge of 0.5 per cent.
