The fund uses optimisation to capture the returns of the MSCI USA Diversified Multi-Factor Net Return Index. From a liquidity standpoint, full physical replication can be expensive if the underlying securities are not easily accessible. Optimisation is constrained under certain parameters--for example, size and volume--and then generates a proxy basket of securities. The fund uses futures for cash equitisation purposes, which helps limit tracking error.
IShares engages in securities lending to enhance the fund’s performance, lending up to 100% of the securities in its fund. Parent company and lending agent BlackRock covers the operational cost in securities lending for a 37.5% stake in the revenue generated from this activity, while the fund keeps 62.5%.
Securities lending exposes the fund to counterparty risk, the possibility that the borrower will not return the securities it borrowed. To manage this risk, BlackRock takes collateral greater than the total loan value. Collateral levels vary between 102.5% and 112%. Acceptable collateral includes equities government bonds, and, cash. The annualised securities lending return as for end-2018 was 0.0% with average on-loan of 3.1% of the fund’s NAV.
BlackRock also provides indemnification for its iShares ETFs. If a borrower defaults and fails to return borrowed securities, BlackRock will replace them. The indemnification agreement is subject to changes without notice.
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BlackRock charges a 0.35% fee per year for this offering, which is in the middle of the range relative to other multifactor strategies.
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The fund targets stocks with high exposure to value, momentum, small size, and quality factors. By spreading its bets across a wide variety of stocks and adhering to strict risk constraints, this fund avoids uncompensated risks and earns a Positive Process Pillar rating.
The fund selects its holdings from the large- and mid-cap-focused MSCI USA Index. It uses a complex optimiser to maximise its desired factor exposure while considering each stock's factor exposures and correlations with each other, under a set of constraints to reduce uncompensated bets. By integrating stocks' targeted factor scores, the strategy can achieve deeper tilts than if it mixed separate factor portfolios together.
The optimiser maximises aggregate factor exposure and limits turnover, exposure to nontargeted factors, individual stock and sector tilts, and tracking error relative to its parent index. This approach reduces the portfolio's exposure to a factor as its risk increases because it strives to match the risk level of its parent index.
The largest exposures are toward information technology (20%-25%), followed by industrials, healthcare, and financials (10%-15% each). The top 10 holdings account for approximately 20% of total index weight, with each stock representing approximately 2%. Top holdings include Cigna, Anthem, AT&T, Intuit, and Norfolk Southern Corp.
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IShares Edge MSCI USA Multifactor ETF offers an attractive way to invest in US equities with an exposure to four factors: value, momentum, quality, and low size. The fund targets US stocks that have higher-than-average exposure to above mentioned factors that have historically been associated with market-topping performance. By using an optimiser, the fund achieves stronger factor tilts than rival multifactor funds that combine single-factor indexes. The fund's low fee and stringent risk management should contribute to its edge over the long run, but its short live track record and opaque portfolio construction limit our Morningstar Analyst Rating to Bronze.
This fund seeks to maximise exposure to stocks with attractive value, momentum, small size, and quality characteristics while matching the risk level of its parent index, the MSCI USA Index. The fund uses an optimiser to construct its portfolio that weighs each stock’s targeted factor characteristics against its risk contribution. This approach leads to inconsistent factor loadings because the optimiser shrinks its allocation to factors as their volatility increases. While the optimiser is complex and opaque, it diversifies risks by targeting factors with low correlations to each other and constraining its stock and sector weightings.
This strategy has delivered stronger value and mid-cap tilts than its multifactor passive peers. It aggressively pursues its targeted factors and has a higher active share than many other multifactor strategies. This strategy further strengthens its style tilts by considering its holdings' factor exposures holistically rather than mixing stocks that score well on different individual factors, which can dilute the portfolio's factor exposures. This integrated approach should slightly improve the fund's return potential.
The fund’s index was launched on Feb. 17, 2015. As such, it has not yet established a meaningful live track record. From inception in September 2015 through February 2019, the fund underperformed the US large-cap category average by 0.8% annualised.
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This fund targets stocks with strong value, momentum, small size, and quality characteristics, which have historically been associated with better performance in nearly every market studied over long horizons. The factors this fund targets have reasonable risk-based and/or behavioural explanations for outperforming the market over the long term. They have been extensively studied and tested in academia and practice.
While factors have strong long-term track records, each can underperform the broad market for extended stretches. Combining factors with low correlations to one another, such as value and momentum, can yield a more stable risk/reward profile than any single-factor fund in isolation. A smoother ride may help investors to stay in the course when a particular factor experiences a dry spell.
The fund uses well-established metrics to measure factor exposures and considers how well a stock scores across all four of its targeted factors to select and assign weightings in the portfolio. Strategies that use an integrated factor combination approach like this one can achieve more-aggressive factor tilts than those that use a portfolio mixing approach. Portfolio mixing combines separate single-factor sleeves into an overall portfolio. The advantages of portfolio mixing include transparency and that it's easier to attribute performance across factor sleeves. But these strategies run the risk of combining offsetting positions from separate sleeves that dilute factor exposures in the final portfolio. Although this fund uses an integrated approach, it includes several risk constraints that limit its tracking error to the large-cap U.S. market. These risk controls protect the fund from taking large uncompensated bets but obscure its portfolio construction process.
The fund uses an optimiser to maximise its factor tilts while matching the risk level of its parent. The optimiser layers on constraints such as limiting turnover and individual stock and sector tilts relative to its selection universe, the MSCI USA Index. Such constraints are employed at each semiannual index review. The optimiser also strives to minimise the fund's exposure to nontargeted factors such as dividend yield and liquidity. All these risk controls likely reduce the fund's style purity.
Although this fund lands in the US large-cap blend equity Morningstar Category, it may behave differently than its average peer. The fund's average holding has a market cap of $27 billion, about a fifth of the category average or a third of Russell 1000. This smaller size orientation stems from the fund's explicit targeting of smaller stocks and from breaking the link between market capitalisation and its weightings. The fund has also shown a style tilt towards value, hence notable overweightings on utilities and industrials and underweighting on consumer cyclical and financial services relative to category average.
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As an alternative, investors may consider UBS MSCI USA Select Factor Mix ETF. The fund tracks MSCI USA Select Factor Mix, an index which equally weights six factors including momentum, value, quality, shareholder yield, volatility, and size. While the strategy is transparent and easy to understand, it may provide less consistent exposure to each factor, as some factors may wash others out. At 0.30%, the fund is also slightly cheaper.
Away from strategic beta, investors may also consider funds tracking plain-vanilla US equity benchmarks. At 0.07% each, the distributing Vanguard S&P 500 and the accumulating iShares Core S&P 500 are among the cheapest and top-performing ETFs available among peers.
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