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ArrowShares Introduces a Factor-Based U.S. ETF - ETF News And Commentary

Zacks Equity Research

The global economy presently going through a rough phase and oil prices are refusing to buck the downtrend. In this backdrop, volatility has taken center stage. Meanwhile, the U.S. market indices have already hit multi-year highs on several occasions this year as the domestic economy is maintaining its recovery.

While this has compelled investors to bet on the domestic stocks and the related ETFs, a looming interest rate hike in the wake of upbeat economic data and overvaluation concerns are also raising alarms over the sustainability of the stock market ascent. It seems that only high-quality stocks and the related ETFs can survive this ensuing market turmoil.  

Probably keeping this in mind, issuers look to deploy quality factors as far as possible. After all, be it the developed economies, emerging nations or commodities and currencies, shocks could be felt everywhere. Thanks to this, ArrowShares launched an ETF – Arrow QVM Equity Factor ETF (QVM) – recently.

QVM in Focus

The fund looks to track the performance of the Arrow Insights Quality Value Momentum Index and have exposure of domestic multi-cap stocks. The fund seeks to score high on three basic factors – quality, value and momentum – to mitigate risks and tack on capital appreciation.  

The 50-stock portfolio is equally weighted resulting in minimal company-specific concentration risks. No stock accounts for more than 2.41% of the basket at present. Kohls Corp (2.41%), Western UN Co. (2.23%) and Chemed Corp New (2.21%) are the top three holdings.

Consumer staples (20%), technology (18%), industrials (16%) and consumer discretionary (14%) get double-digit exposure in the fund. Large caps rule the basket with about 66% focus followed by 18% of assets invested in the mid caps and 16% in the small caps. The fund charges 65 bps in fees.

How Could it Fit in a Portfolio?

Several academic researches indicated that the risk-adjusted returns from the quality stocks outperform the broader market over long term. Thus, this ETF could be an interesting pick for investors looking to shift holdings to stocks that have high quality and are rich on value characteristics. The fund also focuses on momentum characteristics so that it does not miss any booming trend (read: 'High-Quality' ETFs for Long-Term Outperformance).

ETF Competition

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. If at all there are factor-based ETFs, so far issuers have mainly paid attention to the single quality factor. Though the trend has been evolving and issuers are increasingly coming up with multi-factor ETFs, the trend is yet to be rampant (read: iShares Proposes Variety of Multi-Factor ETFs).

State Street has also entered into this multi-factor field with a global exposure. State Street funds take into account large- and mid-cap stocks focusing on various regions globally and look to replicate the performance of value, low volatility, and quality factor strategies (read: : Three Quality ETF Launches from State Street).

J.P. Morgan too banked on the trend last year and launched a global equity ETF (JPGE) focusing on factors like value, size, momentum and low volatility (read: .P. Morgan Debuts JPGE, a Smart Beta ETF).

Apart from these, a few products including PowerShares S&P 500 High Quality Portfolio (SPHQ), MSCI USA Quality Factor ETF (QUAL) and MSCI USA Value Factor ETF (VLUE) are presently playing in the field. There is also iShares MSCI USA Momentum Factor ETF (MTUM) which is a notable momentum play.  

Despite these threats, we do not expect ArrowShares to face much problem in garnering assets as instead of applying a single-factor technique, the issuer has insisted on multi-factors and those factors – quality, value and momentum – are yet to be applied in a single fund by any issuer. So, from that context, the product has a rather fresh theme.  

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ARRW-QVM EQ FAC (QVM): ETF Research Reports
PWRSH-SP5 HQ (SPHQ): ETF Research Reports
ISHARS-MS US QF (QUAL): ETF Research Reports
ISHARS-MS US VF (VLUE): ETF Research Reports
ISHRS-MSCI US M (MTUM): ETF Research Reports
JPM-DVSFD RGE (JPGE): ETF Research Reports
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