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SIZE and VLUE Have Redefined Smart Beta Funds

Ivan Kading

An Investor's Guide to Smart Beta ETFs

(Continued from Prior Part)

SIZE invests in smaller stocks

The iShares MSCI USA Size Factor ETF (SIZE) seeks to track the performance of the MSCI USA Risk Weighted Index—a characteristic of smart beta funds. The underlying index draws it components on the basis of each stock’s market capitalization. It primarily selects large-cap and mid-cap stocks from the traditional S&P 500 Index (SPY) that are relatively lower in market cap size in their respective universe. According to the fund’s website, smaller large-cap and mid-cap stocks have a lower risk. However, they have the potential to perform better than their larger counterparts in the long run.

Aims for lower risk with a quality return

According to the fund’s prospectus, “The Underlying Index reweights each security in the parent index using a rules-based methodology so that stocks with relatively smaller average market capitalization and lower risk weightings based on the index provider’s methodology constitute a higher percentage of the Underlying Index.” As a result, the majority of SIZE’s holdings are large-cap and mid-cap stocks. The top five holdings of SIZE are Chubb (CB), Arch Capital Group (ACGL), PepsiCo (PEP), Clorox (CLX), and Stericycl (SRCL).

VLUE fund searches value stocks

The iShares MSCI USA Value Factor ETF (VLUE) is smart beta value fund by iShares. It seeks to track the performance of the MSCI USA Enhanced Value Index. The underlying index selects large-cap and mid-cap stocks on the basis of each stock’s value. According to the fund’s website, the value is determined by using three variables. The valuation multiples include the PBV (price-to-book value) ratio, the PE (price-to-earnings) ratio, and the PDCF (price-to-distributable cash flow) ratio. The ratios are used to determine the value for every company. As of August 17, 2015, the average PBV, PE, and PDCF ratios for VLUE were 5.06, 19.64, and 14, respectively.

The underlying index is primarily invested in the finance, healthcare, and technological sectors. VLUE’s top holdings include ExxonMobil (XOM), JPMorgan Chase (JPM), and Apple (AAPL). The one-year annual return for VLUE is 5.31% as of August 14, 2015. This is greater than its index, or benchmark, with a return of 5.21%.VLUE’s AUM (assets under management) is $685 million. It’s distributed over 638 securities.

Next, we’ll discuss the volatility and combined factor aspect of iShares’ smart beta funds.

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