Northern Trust continues to expand its ETF lineup under its
‘FlexShares’ brand and for good reason given how popular its four
most recent ETFs have been. These products have already given
Northern Trust over $1.5 billion in AUM, suggesting that the firm
has already seen great success despite possessing funds that are
just a little over one year old.
Thanks to this trend, FlexShares announced the debut of two more
funds, utilizing the ‘tilt’ model that is currently the basis for
the firm’s Morningstar US Market Factor Tilt Index Fund
(TILT). This product has over $125 million in AUM,
although it trades on light volume, so it is easy to see why
Northern Trust would want to further expand on this methodology
with other ETFs (read Active Large Cap ETFs: The Best of Both
Worlds?).
In doing this, the company is expanding beyond the U.S. market
and into both developing and emerging nations with the ‘tilt’
strategy. This technique looks to push the portfolio away from
large caps and put a greater focus on small cap securities.
Tilt Strategy in Focus
These pint sized securities are often overlooked—if not entirely
forgotten—when compared to their large cap counterparts despite
their potentially superior growth metrics. This suggests that many
investors are too heavily concentrated in low growth large cap
stocks, usually to their own detriment if they are looking for long
term asset appreciation.
Yet, the tilt focus still recognizes the value of large caps in
a portfolio and the safety that these bring to investors. It
forgoes the strategy of equal weight ETFs and pure small cap
products in order to just ‘tilt’ towards small caps instead of
giving the space a massive overweighting.
By doing this, investors could potentially obtain a better risk
reward profile for their holdings in a way that still isn’t too
concentrated in small caps. Instead, it is just a
tilt towards small caps, hence the name (read the
Comprehensive Guide to Total Market ETFs).
For investors who find this strategy intriguing, the recent
announcement of FlexShares which looks to expand this lineup could
be interesting. The firm is now going beyond the U.S. market with
the tilt approach, with the Morningstar Developed Markets
ex-US Factor Tilt Index Fund (TLTD), and the
Morningstar Emerging Markets Factor Tilt Index Fund
(TLTE).
Below, we highlight some of the key points from these recently
launched ETFs for those investors who are looking for a new way to
play international markets that has just a little bit more exposure
to small cap securities:
TLTD- This new ETF looks to track the
Morningstar Developed Markets ex-US Factor Tilt Index which is a
benchmark focusing on international firms from developed markets
with added exposure to small cap stocks. For this approach, the
firm looks to charge investors a relatively solid 0.42% in fees
after waivers (read Ten Biggest U.S. Equity Market ETFs).
In terms of holdings, the fund is expected to be skewed towards
financials (23%), while materials, industrials and consumer
discretionary stocks are all expected to make up at least 11% of
assets as well. For nations, Japan and the UK both make up about
20% each, while Western Europe and the rest of the Anglosphere
accounts for much of the rest of the fund.
TLTE- If you are looking for the tilt approach
in emerging market form, look no further than TLTE. This product,
which costs 65 basis points a year after waivers, follows the
Morningstar Emerging Markets Factor Tilt Index giving exposure to
developing economies around the world with a small cap tilt.
In terms of holdings, financials again take the top spot at just
under 23% of assets, while they are followed by 13% weights to
technology and materials. For national exposure, China takes the
top spot, while a number of Asian markets rounding out the top
three, thanks to Korea and Taiwan, while Brazil and South Africa
also receive decent allocations as well (see Three Biggest Mistakes
of ETF Investing).
ETF Competition
While there obviously are not any direct competitors to these
new products in the international markets, there are a host of
other funds targeting both developed nations as well as emerging
countries currently available in the ETF world. Given this,
investors will probably look to TILT in order to give some idea of
how the tilt strategy can perform when stacked up against broad
markets.
Over the trailing one year period, TILT has been pretty
consistently neck and neck with SPY and RSP in terms of overall
returns, although SPY has definitely beaten it out over the past 52
weeks. A similar trend appears when taking a year-to-date look,
with TILT finishing in the middle of SPY and RSP (SPY performing
the best).
However, it should be noted that SPY often outperforms in rough
markets compared to the other two, due to its focus on large cap
safety, while RSP performs the worst thanks to its more volatile
nature. Thanks to this, investors should probably consider TILT,
and the two new funds, TLTE and TLTD, as a ‘middle road’ between
equal weight and pure market cap funds (see Is It Time for an Equal
Weight ETF?).
In other words, these tilt products seem unlikely to outperform
both styles in any given period, and will probably have highly
correlated performance that is less volatile than equal weighting
and more volatile than pure market cap weighted products. So these
new tilt products should instead be looked at as a potentially
better mix of growth and safety, for those seeking a different path
than what is currently on the market for international ETFs.
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Follow @Eric Dutram on Twitter
Author is long RSP.
GUGG-SP5 EQ ETF (RSP): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
FLEXS-MRN USMFT (TILT): ETF Research Reports
(TLTD): ETF Research Reports
(TLTE): ETF Research Reports
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