Sunday kicks off the always educational Inside ETFs annual conference in Florida, where there will likely be 2,000-plus attendees—about one attendee for each of the 2,192 exchange traded funds and exchange traded notes in CFRA’s database. CFRA is excited to again help kick off the conference alongside Matt Hougan for a session on recommended do’s and don’ts about ETF investing. What’s more, there are other compelling topics and panels that are worthy of attendees' time, including multifactor ETFs, actively managed products and new or hidden gem products.
Multifactor ETFs Break Out
While factor investing has increasingly gained in popularity, last year was a breakout year for multifactor ETFs that sort through the equity universe based on value, quality, size and other quantifiable attributes. Collectively, these ETFs gathered $17 billion in assets in 2018, up from $14 billion a year earlier, but there are important differences between the products likely to be referenced by conference panelists.
For example, John Hancock Multifactor Large Cap ETF (JHML) is powered by an index created by Dimensional Funds and incorporates relative value, size and profitability attributes (akin to quality) on a sector basis. Meanwhile, X-Trackers Russell 1000 Comprehensive Factor ETF (DEUS) adds momentum and low volatility to value, size and quality factors relative to the broader large-cap universe. Both earn a top rating from CFRA based on our combined holdings and cost-factor analysis, but what’s inside these funds is distinct. JHML has more exposure to financials and health care stocks and less in industrials and utilities.
A third top-rated ETF, Invest S&P 500 High Dividend Low Volatility ETF (SPHD), focuses on just two more defensive factors and has higher exposure to consumer staples and utilities relative to DEUS and JHML.
Heavyweight Active Managers Have Entered the Ring
Many of the assets flowing into multi factor ETFs came from investors paring back from more expensive actively managed equity mutual funds, according to CFRA analysis. Yet, we think the still-emerging actively managed equity ETF universe, which added $3.4 billion in new assets in 2018, will be topical at the conference. Some prominent active management teams, including Clearbridge, Davis and Vanguard, launched products that have what CFRA views as appealing attributes. Clearbridge All Cap Growth ETF (CACG), Davis Select USA (DUSA) and Vanguard US Value Factor (VFVA) are examples.
As expected for ETFs that don’t track an index, what’s inside is quite different from one actively managed ETF to another. For example, DUSA recently had 44 percent of its assets in the financials sector—well above the 26 percent for VFVA and 3 percent for CACG.
Active Bond Fund Flows Doubled
While active equity ETF flows were modest, active bond ETF net inflows doubled to $22 billion in 2018, driven by demand for ultra-short-term bond ETFs such as JPMorgan Ultra-Short Income (JPST), First Trust Enhanced Short Maturity (FTSM) and PIMCO Enhanced Short Maturity Active ETF (MINT). Yet, as the Federal Reserve plans to be more patient in raising rates, relative to 2018, it will be interesting to see if more intermediate-term products such as Fidelity Total Bond ETF (FBND), PIMCO Active Bond ETF (BOND) and SPDR DoubleLine Total Return Tactical (TOTL) generate strong interest this year.
Digging in on Hidden Gems
Though the ETFs listed above are smaller than the cheapest and broadest asset allocation products from iShares and Vanguard that dominated 2018 flows, they are far from hidden gems, in our opinion. Yet, there are two sessions worthy of catching at Inside ETFs that can help attendees learn about some of the newer, under-the-radar strategies.
CFRA will be part of one session on Tuesday titled “Best New ETF 2018: A Battle of the ETF Pundits.” We don’t want to reveal the picks from fellow panelists from Hougan, ETF.com's Dave Nadig, Bloomberg ETF analyst Eric Balchunas and others. But we can share CFRA will highlight X-Trackers Russell 1000 US QARP (QARP), which launched in April 2018. Our independent rating confirms QARP holds high-quality stocks such as Boeing, Home Depot and Procter & Gamble, trading at an attractive price, which indeed is what the index ETF sets out to do. Moreover, some picks from other presenters are also viewed favorably from CFRA.
Back to the Mine
The ETFs in the other related session on Monday afternoon, titled Back to the Mine: Hidden Gems 2.0, will be presented by asset management personnel. The list of to-be-profiled ETFs includes many covered by CFRA for those who want an independent perspective. One such ETF, Franklin LibertyQ US Equity (FLQL), favors quality and value factors, with a more modest focus on momentum and low volatility.
A second one, ProShares Online Retail (ONLN), holds global internet retailers, including Amazon, Alibaba and Wayfair on a cap-weighted basis, with the top 10 holdings comprising approximately 75 percent of assets. A third is Reverse Cap Weighted US Large Cap ETF (RVRS), which holds the S&P 500 Index constituents but in a different way than others. RVRS weights the stocks inside the 500 from smallest to largest. Unlike SPDR S&P 500 ETF (SPY), which holds hefty stakes in Microsoft and Apple because they are the biggest U.S. stocks, RVRS’s largest holdings include more moderately sized Foot Locker and TripAdvisor.
Every year, there are ETFs that emerge from the clutter to generate either above-average returns or unexpected asset growth. These two sessions will likely give attendees some new ideas to consider.
If you are attending Inside ETFs, stop by the CFRA booth (#500) to learn more about our forward-looking, holdings-focused research.
This article was originally published on MarketScope Advisor on February 5, 2019. Visit https://newpublic.cfraresearch.com/ for more info.
Todd Rosenbluth is the director of ETF and mutual fund research at CFRA. Learn more about CFRA's ETF research here.
