State Street became the latest ETF firm to launch factor-based equity ETFs this week, rolling out a pair of funds that will segment the universe of large, mid, and small U.S. cap stocks based on valuation and momentum factors. The two new ETFs will segment the S&P 1500 Index, a broad-based benchmark that includes substantially all of the publicly-traded U.S. market capitalization. The new factor ETFs are highlighted below :
- SPDR S&P 1500 Value Tilt ETF : This ETF will apply an alternative weighting methodology to the S&P1500 Index, seeking to give the largest weightings to stocks that exhibit cheap valuations. In determining valuation, the index will consider price-to-earnings, price-to-cash flow, price-to-sales, price-to-book value, and price-to-dividends. Components deemed to have the cheapest valuation will be overweighted relative to stocks with loftier valuations.
- SPDR S&P 1500 Momentum Tilt ETF : This ETF will use an alternative weighting methodology to shift assets towards stocks exhibiting positive momentum factors, as measured by performance over the 11 months ending one month prior to the rebalancing date.
Under The Hoods
|MMTM Index |
|Dividend Yield ||2.04% |
|Forward P/E ||15x |
|Price-to-Book ||2.6x |
As of September 30, the top holdings in MMTM included Apple (AAPL, 8.4%), Exxon Mobil (XOM, 2.8%), and AT&T (T, 2.3%). Several other blue chips also made the top ten, including GE, Pfizer, and Microsoft. The fund gives its largest sector weighting to technology, which is not surprising given the red hot performance from tech stocks so far in 2012. The lowest weights are to utilities (4%) and materials (3%).
|VLU Index |
|Dividend Yield ||2.14% |
|Forward P/E ||13x |
|Price-to-Book ||1.7x |
As of September 30, the top holdings in VLU exhibited a bit of overlap with MMTM; Exxon (3.3%), AT&T (2.3%), and Apple (2.3%) were the top holdings. While that may seem strange, it's a result of the methodology employed; the overlap between these two products will be almost perfect in terms of the individual stocks held, with the difference coming in the weightings assigned to each. For example, AAPL receives a much smaller weighting in VLU than it does in MMTM.
Factor ETF Investing In Focus
There are now several ETFs that offer exposure to so-called factor investing styles approaches that involve segmenting a broad, cap-weighted index based on certain fundamental factors. Many of these ETFs have become quite popular; low volatility ETFs in particular have caught on with investors looking to scale back risk while still keeping a fair amount of skin in the game.
VLU and MMTM will be somewhat unique in that it will simply tilt exposure towards certain stocks and away from others, as opposed to picking and choosing which components make the cut. Other forms of factor investing include:
- High Beta
- High Volatility
- Low Beta
- Low Volatility
Both new ETFs will charge an annual expense ratio of, putting them below the average for the All Cap Equities ETFdb Category. The cheapest ETF in that category, Schwab's U.S. Broad Market ETF , charges just 0.04%.
Disclosure: No positions at time of writing.