Tracking Moves In Some Smart Beta ETFs

The proliferation of and assets flowing to smart beta exchange-traded funds are themes ETF industry observers widely expect to continue and data support those notions.

At the end of January, there were 600 smart beta ETFs with a combined assets under management tally of nearly $480 billion. Increased institutional adoption of smart beta ETFs is expected to fuel ongoing growth in this corner of the ETF space.

A common refrain regarding smart beta ETFs is that these funds blur the line between active and passive management. As such, smart beta ETFs can and frequently do feature higher turnover rates than more traditional passive funds. That means investors should stay abreast of sector-level and stock changes in their smart beta ETFs.

“These ETFs are constructed based on one or more fundamental and/or valuation attributes and are regularly rebalanced. As such, the holdings inside and related sector exposure can and will shift periodically. In exchange, the fees for these products are at a moderate premium to market-cap weighted ETFs,” said CFRA Research in a note out Monday. 

Example ETF: EZM

A good example of a smart beta ETF that recently underwent some changes is the WisdomTree MidCap Earnings Fund EZM. As its name implies, EZM weights its holdings based on earnings, ensuring the ETF's member firms are profitable.

EZM follows the fundamentally-weighted WisdomTree MidCap Earnings Index. That index has an emphasis on core earnings, which “is a standardized calculation of earnings developed by Standard & Poors designed to include expenses, incomes and activities that reflect the actual profitability of an enterprises ongoing operations,” according to WisdomTree.

“According to WisdomTree, the act of annually rebalancing constituents of its proprietary index is an important risk control. For WisdomTree MidCap Earnings Fund (EZM), companies with share prices that appreciated at a faster rate than their fundamental improvement would typically be reduced. Meanwhile constituents with improving earnings, but stable or falling prices, would be added to during the rebalance,” said CFRA.

EZM's consumer discretionary exposure recently ticked higher while the ETF's energy was reduced a bit.

And Others

The popular PowerShares S&P 500 Low Volatility Portfolio SPLV also recently saw some sector-level changes. Believe it or not, SPLV's changes include increased technology exposure and a lower weight to the utilities sector.

“Exposure to information technology and consumer discretionary rose to 7 percent and 9 percent, respectively, up from 4 percent and 7 percent at its rebalance. Such moves narrowed the underexposure compared to the broader index. Meanwhile, the relatively high weights in utilities (19 percent vs. 22 percent) and real estate (4 percent vs. 6 percent) were trimmed.  SPLV has a 0.25 percent expense ratio,” said CFRA.

The research firm has a Market-Weight rating on EZM and an Overweight rating on SPLV.

Related Link: A Smart Beta Spin On Emerging Markets