iShares Files for Risk and Value Weighted ETFs

Zacks

iShares, the San Francisco-based global leader in ETFs, has long had a dominant position in the ETF world. The company was starting to slip a bit to start 2012 though, and responded with a deluge of fund launches and fee cuts throughout the year.

These moves have likely cemented iShares’ spot at the top for at least a bit longer, especially thanks to a host of lower cost products which can finally compete with the likes of Vanguard. If lower cost funds and more innovative bond ETFs wasn’t enough, the company has also recently revealed new plans for two more U.S. focused ETFs.

In the recent SEC filings, iShares detailed ideas for two funds that have a domestic focus, but with a twist. One will focus in on value stocks while the other will zero in on low risk securities, potentially giving investors new options in these genres (see Time to Consider Pure Growth and Value ETFs?). 

Yet before you rush out to look up more on these two, it is worth noting that the filings were not complete and that key information like ticker symbols and expense ratios were not made available. Still, we have highlighted some of the most important details below for those who are intrigued by iShares latest push in the domestic equity market:

MSCI USA Risk Weighted Index Fund

This proposed ETF looks to go beyond market cap weighting and instead focus on stocks that have lower risk levels. The fund then looks to give the biggest weights to these lower risk stocks, tilting the portfolio to lower beta levels.

This risk looks to be calculated using the inverse of a given stock’s historical variance, estimated based on three years of weekly return data. This generally results in a smaller average market capitalization, and a focus on consumer stocks, financials, and utilities, although this can obviously change over time.

MSCI USA Value Weighted Index Fund

This proposed fund seeks to offer up a new way for investors to target value stocks, once again going beyond traditional cap weighting. This looks to be done by tracking stocks with a lower market value compared to well-established accounting measures of value (read Try Value Investing with These Large Cap ETFs).

These include book value, and then three year averages of sales, earnings, and cash earnings. This results in a benchmark that is tilted towards energy, financials and technology firms, but much like in the risk product, this can change over time.

ETF Competition

iShares could have a pretty difficult fight on its hands when it comes to establishing a solid asset base in these two niches. Both value investing and low risk targeting are strategies that continue to see a great deal of interest among a variety of investors.

In terms of the multifactor value model, arguably one of the biggest competitors could be the PowerShares FTSE RAFI US 1000 ETF (PRF). This fund has over one billion in AUM and utilizes the RAFI technique in order to weight stocks.

The low cost product has nearly 1,000 securities in its basket but it does see a relatively weak volume of less than 90,000 shares a day. However, bid ask spreads are relatively tight and it is one of the most popular funds that breaks the link between stock price and weight.

Meanwhile on the volatility side, a big competitor could be the ultra popular PowerShares S&P 500 Low Volatility ETF (SPLV). This fund has over three billion in AUM and sees average daily volume exceeding one million shares (see Zacks Top Ranked Low Volatility ETF in Focus).

The product doesn’t weight purely by volatility though, so its portfolio may be a little smaller than its proposed counterpart. SPLV only has about 100 stocks in its basket, consisting of the 100 lowest volatility stocks, so it could be a more concentrated, but lower volatility play, on the broad market.

These two examples are only the tip of the iceberg for the competition that is awaiting any future value and low volatility funds that iShares may launch. iShares will clearly have to rely on their solid brand name in order to make inroads in this competitive space, but if history is any guide, they should have no trouble here either.

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