The ETF data outfit Ultumus reported a few days ago that French owned asset manager Lyxor had listed three new factor ETFs in London (DOSH, BUCK, DIVU) “that pick stocks based on quality, low volatility and yield”. The three factors aim to lower the funds’ exposure to high dividend equities that are susceptible to large price falls.
DOSH is indexed to the FTSE 350 ex Investment Trusts Qual/Vol/Yield Factor Indexes. While BUCK tracks the FTSE US Qual/Vol/Yield Factor 5% Capped Index, DIVU is the USD denominated version. We’ve managed to track down a bit more info on these three ETFs — each of which has a TER of 0.19% and distributes any income payout six monthly. The box below fleshes out some more detail on the two main ETFs, DOSH and BUCK.
More info on the Lyxor ETFs
DOSH : The Lyxor FTSE UK Quality Low Vol Dividend (DR) UCITS ETF is a UCITS compliant exchange traded fund that aims to track the FTSE 350 ex Inv Trust Qual/Vol/Yield Factor 5% Capped Index. The FTSE 350 ex Inv Trust Qual/Vol/Yield Factor 5% Capped Index is representative of high quality UK equities that exhibit relatively low volatility and high dividend yields.
Sector exposure: Financials 18.94%, Consumer staples 14.5%, Consumer discretionary 12.7%
Largest three holdings: HSBC 6.26%, Royal Dutch Shell 4.24%, BP 4.03%
BUCK : The Lyxor FTSE US Quality Low Vol Dividend (DR) UCITS ETF is a UCITS compliant exchange traded fund that aims to track the FTSE USA Qual/Vol/Yield Factor 5% Capped Index. The FTSE USA Qual/Vol/Yield Factor 5% Capped Index is representative of high quality US equities that exhibit relatively low volatility and high dividend yields.
Top three holdings: Microsoft 2.49%, Apple 2.4%, Amazon 1.86%
Sector Exposure IT 22.2%, Financials 16.2%, Healthcare 13.9%
FTSE’s new take on smart beta
We’ve also dug up some more information on the underlying indices behind the ETFs. You can see the index methodology explained online here: http://www.ftse.com/products/downloads/Multifactor-Indexes-Overview.pdf
The indices target three main factors or styles of stock: quality, dividend and lower volatility. The second box below fleshes out exactly what FTSE means by these measures. Our take on these new ETFs is that they’re trying to reinvent a very successful investment strategy — quality equities investing as practised by the likes of Nick Train here in the UK.
Over the years quality investing has come to dominate the retail investment landscape with actively managed funds taking in countless billions. The attraction? Good quality businesses with sound balance sheets and relatively defensive virtues in terms of the share price.
The Lyxor ETFs also build on the quantitative research of SocGen analyst Andrew Lapthorne, who’s also built the methodology behind Lyxor’s existing, highly successful, quality and income ETF range. Lapthorne has long maintained that value investor’s focused on just a high yield are missing the bigger picture — you also need to be focused on the balance sheet and the quality of the business’ earnings growth. In theory, if such a screen does manage to pick up the ‘right’ businesses, they’ll also prove to be more defensive in nature during any market volatility — thus their lower targeted share price volatility. As an aside the existing Quality Income range of ETFs from Lyxor (tracking Lapthorne’ s ideas) have a much higher TER of around 0.45%, against 0.19% for these ETFs.
As with all smart beta ETFs the real test is the stocks the strategy picks! Looking down the list of current index constituents in the Uk version one doesn’t see a massive difference when compared to a mainstream index such as the FTSE 350. In the US by contrast tech and consumer stocks seem to be much more prominent, which represents a big tilt away from the benchmark index. More generally we’d also observe that there are huge differences between these ETF portfolios and the more concentrated vehicles run by established quality stock investors such as Nick Train — see his most public vehicle Finsbury Income and Growth trust online at http://www.finsburygt.com/. Currently in this very actively managed fund, his top three holdings are Unilever, RELX and Diageo.
But arguably this misses the point. These are meant to be ‘tilts’ not clones of actively managed funds. And the tilts — the factors — suggested in the index make a great deal of sense. Our hunch is that once investors begin to take up to the strategy on offer — and the low fees — this could become a very popular smart beta ETF in the retail space.
More info on the FTSE indices used
Factor 1 : Quality
The Quality Premium: Higher quality companies tend to demonstrate higher performance than lower quality companies.
Quality tilts: Can help capture companies with the ability to consistently generate strong future cash flows, while limiting exposures to stocks that are unprofitable or highly levered.
Definition: Composite of profitability, efficiency, earnings quality and leverage.
Factor 2 : Lower Volatility
The Low Volatility Premium: Stocks that exhibit low volatility tend to perform better than stocks with higher volatility.
Low volatility tilts: Can help capture companies with a historically lower risk (and higher return) profile relative to higher risk counterparts.
Definition: Standard deviation of 5 years of weekly local total returns.
Factor 3 : Yield
The Yield Premium: Higher yielding stocks (dividends) tend to perform better than stocks with lower yields.
Yield tilts: Can help capture companies that have recently delivered strong dividends to shareholders.
Definition: 12 month trailing dividend yield.
FTSE on avoiding the yield trap
“ Qual/Vol/Yield indexes are designed to select companies that exhibit a higher dividend yield than that of the underlying indexes. However, many dividend indexes suffer from a “yield trap” in which stocks that have experienced large price declines may receive the largest weights. Academic and practitioner studies point to ways in which the Quality factor may temper the tendency for high yielding stocks to be associated with low quality or “junk” stocks. “
FTSE on defining quality business
“High quality companies have proven to be relatively resilient during periods of economic hardship. In line with the academic literature, FTSE Russell defines quality as the consistent ability to generate strong future cash flows. The combination of quality and yield selects companies with the ability to consistently pay, as well as to possibly increase, their dividends. “
FTSE on reducing risk
“ The low volatility factor targets volatility reductions based on historical return information. The rationale for combining low volatility and quality is to capture relatively stable and less volatile companies along two dimensions: returns and fundamentals.”