The ETF industry continues to grow at an impressive rate and evolve with several launches and filings that are lined up. Total assets in U.S. listed ETFs are close to $1.81 trillion, while the number of products is more than 1,591 now. Investors should note that most of the products launched this year are focused on high quality or low volatility factors especially given the bout of volatility in the global markets.
In keeping with the trend, State Street recently came out with three ETFs targeting Europe, Australia and the Far East (EAFE), emerging markets as well as the global markets. The trio – SPDR MSCI EAFE Quality Mix ETF , SPDR MSCI Emerging Markets Quality Mix ETF and SPDR MSCI World Quality Mix ETF – hit the market on June 5.
Newly Launched ETFs in Focus
The funds take into account large- and mid-cap stocks and look to replicate the performance of value, low volatility, and quality factor strategies. The underlying indexes for these funds are equal-weighted combinations of the three MSCI Factor Indices: the MSCI Value Weighted Index, the MSCI Minimum Volatility Index, and the MSCI Quality Index meant for EAFE, EM and global markets respectively (read: Hedge Your Portfolio with Low Volatility ETFs).
SPDR MSCI EAFE Quality Mix ETF : The 543-stock fund looks to track the performance of the MSCI EAFE (Europe, Australasia, and Far East) Quality Mix Index. Individual holding wise, the index is well diversified with Nestle (2.49%), Roche (2.36%) and Novartis (2.07%) taking up the top three positions.
Sector wise, financials and consumer staples accounts for, respectively, 17.7% and 16.4% of the index while healthcare (13.9%), industrials (11.6%) and consumer discretionary (11.2%) round out the top five spots. As far as regional breakdown goes, the index is concentrated in UK with about 27% exposure followed by Japan (16.2%) and Switzerland (12.9%), with other nations getting lesser focus. The fund charges about 30 bps in yearly fees.
SPDR MSCI Emerging Markets Quality Mix ETF : By holding about 511 stocks, the fund intends to track the performance of the MSCI Emerging Markets (EM) Quality Mix Index. The index is heavy on China (19.7%), Korea (14.4%) and Taiwan (12.8%) although over a dozen other countries also receive an allocation.
Sector wise, financials takes the top spot with more than one-fifth of total assets while IT (17.5%), energy (11.9%), consumer staples (11.7%) and telecom (11.2%) complete the top five sectors. The index also does not have concentration risk with Samsung (2.99%), Taiwan Semiconductor (2.82%) and China Mobile (2.47%) being the top three companies. QEMN also charges 30 bps in fees.
SPDR MSCI World Quality Mix ETF : This ETF looks to track the MSCI World Quality Mix Index to produce a lower realized volatility level. The index puts about three-fifths of the portfolio in the U.S. while U.K. and Japan make up 8% of the fund each.
QWLD has about 1,000 stocks in its basket. None of the companies in the index accounts for more than 2.49% of assets. In terms of sectors, financials (14.8%), healthcare (14.1%), IT (13.5%), consumer staples (12.9%) and discretionary (12.7%) – the top five sectors of the ETF – get very close allocations. QWLD charges the same fees as the other two products.
How could they fit in a portfolio?
These ETFs could be interesting picks for investors looking to diversify their exposure across the globe, but are still seeking to shift holdings to stocks that have high quality and are rich on value characteristics.
The U.S. market contracted in Q1 this year for the first time since 2009. Though the ongoing quarter is shaping up favorably on some bullish data points, the labor markets are yet to improve completely. The possibility of an end to cheap dollar era is also in place.
This might have spurred investors to look beyond the U.S. But foreign markets are also not free from twists and turns. Deceleration in China and deflationary fears in Europe left investors dithering and looking for some absolute quality picks. Several academic researches indicated that the risk-adjusted returns from the quality stocks outperform the broader market over long term (read: 'High-Quality' ETFs for Long-Term Outperformance).
Even though the ETF industry is fast evolving, the space is stuffed with vanilla ETFs with smart-beta or high quality products taking a small share of the industry. A few products including PowerShares S&P 500 High Quality Portfolio (SPHQ - ETF report), MSCI USA Quality Factor ETF and MSCI USA Value Factor ETF are presently playing in the field. As a result, the new entrants in the quality space should not face much rivalry in amassing investor money (read: Inside the New Quality ETF from iShares).
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