ETF New ishares smart-beta ETFs

iShares / blackrock have released some new smart-beta ETFs

See iShares Smart Beta | BlackRock AU

The products are:

• MVOL - iShares Edge MSCI Australia Minimum Volatility ETF | MVOL
• WVOL - iShares Edge MSCI World Minimum Volatility ETF | WVOL
• AUMF - iShares Edge MSCI Australia Multifactor ETF | AUMF
• WDMF - iShares Edge MSCI World Multifactor ETF | WDMF

As they are new ETFs and don't directly track an index it is not easy to work out income performance.

 

The multi factor funds are interesting and cheap (ish).

You have to acknowledge the works of Ross, Fama and French and these ETF's give access to guys who like Arbitrage Pricing Theory.

 

Not big on minimum vol but the multi-factor products are interesting. Will be good to see them get some support.

 

I agree with you on the minimum volatility stuff. Oh Volatility, the bogeyman of share investing. It's an investor's best friend and yet the lengths investors will go to in trying to avoid it.

I found the following interesting:
iShares Edge MSCI Australia Multifactor ETF
Target four proven drivers of return in your Australian equities exposure: Quality (financially healthy firms), Value (inexpensive stocks), Size (smaller companies) and Momentum (trending stocks).

Current top 5 stocks in the portfolio:
CBA 7.73%
WBC 5.82%
ANZ 4.21%
NAB 3.80%
BHP 3.59%

Weighting:
Financials - 33.99%
Materials - 21.99%

Maybe the programmer forgot to include the SIZE rule?

 

Agree. Volatility is great if you time it right. Bring on a US interest rate rise.

It's a pity they don't publish 2 to 5 years worth of backtest data for the portfolios in this group of ETFs. I'm going to have a go at doing this myself but it will be fiddly.

 

Plus for us dividend investors Volatility is of little concern given our focus is on the relatively stable income as opposed to price which can be all over the place.

 

Those are significantly less than index weights. CBA for example is 9.5%, WBC 7.4%. Across the portfolio there is notably lower concentration than the index.

 

actually have a look at the top 25. I'm surprised by just how different it is to the ASX200/300. A large "small" factor tilt once you go ex the top 5. (click show all)

iShares Edge MSCI Australia Multifactor ETF | AUMF

 

In Bloomberg’s “Attack of the algorithms” Effinger and Balchunas write that “the essence of smart beta, or strategic beta, or scientific beta, or factor-based investing, or fundamental indexing, depending on which Ph.D. is talking…It’s index investing with key twists, all of them rules-based, with no active management required (not sure about that last bit)

It’s index investing with key twists, all of them rules-based, with no active management required. Most smart-beta funds track custom indexes. Some are simple variants of the Standard & Poor’s 500 Index and do what they say on the box. Others are hand-crafted and small batch, made by people with little more than a stock-filtering system and a dream.

 

Thornhill has quite a following. Could team up with one of the ETF providers to produce a Thornhill-approved industrials minus REITs and resources Smart Beta ETF. Then again, maybe not. Might put his reputation on the line.

 

He'll probably smack you if you suggested he have anything to do with ETFs. He does not like them at all.

Why would he bother when there's already WHF (Industrials only), founded in 1923, which holds a little AReits, a minor negative, but remember they are constituents of the Broad All Industrials index.

Besides any such ETF is unlikely to have a fee less than 0.35% being a niche ETF. More importantly you wouldn't be able to buy any such ETF at around 8 - 10% discount to its underlying assets. This way way more than makes up for the small exposure to AReits held by WHF.

Of course as most here probably know WHF is one of Thornhill's core LIC holdings.

ETFs and LICs continue to flood the market. But the reality is everything a conservative long term investor needs has existed long before these new and shiny ETFs products started appearing on the market.

 

So, a somewhat fiddly backtesting experiment tonight for the AU Multifactor AUMF ETF.

• I ran the scenario for 2 years going back to 11 March 2015 using sharesight.
• Holdings are from https://www.blackrock.com/au/individual/products/284664/ishares-edge-msci-australia-multi-factor-etf/1424941901973.ajax?fileType=csv&fileName=AUMF_holdings&dataType=fund&asOfDate=2017/03/09
• Weightings used were as per the current AUMF weights for 10 March 2017.
• The scenario excludes NXT, SRX, SIQ, GDI, VRT, AGI, CAT, however this reflects only 2.62% by weight of the original ( this was due to error trying to get the historical stock prices from yahoo ).
• Total value of portfolio is $974,000.
• Dividend reinvestment was turned-off.

This is the result of the backtest covering the last 24 months and has some interesting results:

• the portfolio return of 23.29% per annum out-performed the ASX STW 200 index by 18.48% per annum
• the income return of 7.02% per annum outperformed the ASX STW 200 index by 2.17% per annum
• the capital return of 16.27% per annum outperformed the ASX STW 200 index by 16.31% per annum ( index had a loss of 0.04% pa )

Some other interesting findings for the banks:

• a weighting of 22% of the initial portfolio
• the banks collectively lost 4% per annum in capital, however had an income return of 6.99% per annum
• as can be seen from the figures, the income return for the banks alone of $30,534.05 made up for the $17,464.74 capital loss in the bank stocks by a factor of 1.75

(edit - current value on the screenshot seems wrong, I have raised a bug with sharesight. the other data seems correct)




Edit - updated for ASX STW 200 index.

 

I ran the same backtest above for WHF. @austing do you have NTA figures for WHF effective for 11 March 2015?



Edit - Admittedly, not a fair comparison. ishares had the benefit of hindsight in constructing their portfolio for AUMF ( it has only been on the ASX since October 2016 ).

 

Long run you might get 2-3% from factors but you'll have more turnover and Cg distribution as a result.

Analysis over 2 years is totally meaningless. You'll go whole decades where some factors won't work. What you are seeing recently is value factor working, the resources bounce back. QOZ will look similar. Most people won't stick. Go back further and you'll see it lagging XJO. That is where the long run outperformance comes from. Value and small are great examples of this. If you commit, you do so for decades. Personally, I like Research Affiliates methodology and will work in the right product. Don't expect a magic ticket though....

 

A good question for the BNE meet up. Just WTF are you on about when it comes to ETFs Mr Thornhill, is it the index construction, fund operation or something else?"

I'd suggest some mutterings about counter-party risk and that's about it.

 

Just read that Vanguards was founded in 1975 by Bogle. Interesting. At the Sydney course Thornhill was concerned that ETFs had not been "tested" in a major crash. ETFs have been operating since the 90's. Seems overly cautious? Perhaps wise to steer away from the smaller and newer players though.

 

Not a great start for WDMF. It has only been operating for 6 months.

 

Yes the same thing he told me about a decade ago. I don't agree unless the ETF is of a synthetic variety. STW one of the oldest and largest Aussie index (ASX 200) ETFs has certainly been crash tested.

I happily hold Vanguard's International ETF and have no concerns about counter-party risk etc.

 

Ooops! I've been in communication with sharesight and had some bugs in my initial import spreadsheet.

This is the more correct backtest of AUMF.

• Back test from 17 March 2015 to 16 March 2017
• Initial value of all stocks imported = $974,900
• Weighting as per this spreadsheet
• Excludes the codes CGC, ECX, IEL, MHJ, WGX, WTC ( as these did not have a valid price on 16 March 2015 )

Note the performance compared to the ASX 200:

• the portfolio return of 31.89% per annum out-performed the ASX STW 200 index by 26.79% per annum
• the income return of 5.84% per annum outperformed the ASX STW 200 index by 0.22% per annum
• the capital return of 26.03% per annum outperformed the ASX STW 200 index by 25.81% per annum

The performance of the bank portion of that portfolio:



And the full portfolio:

 

Posted on the Boglehead thread. Young Jack's unlikely to win too many friends in the Smart Beta community:

Boglehead/Vanguard way to retire.