ETFs Become More Precise

Terry Flanagan

The next generation of exchange traded funds will have a more precise, and specific purpose.

Russell Investments, and its subsidiary of Russell ETFs, with north of $85 billion, has launched three ex- U.S. equity “factor” ETFs. Listed on November 3 on the NYSE Arca exchange, the new products will take the previously launched domestic low beta, low volatility and high momentum factor ETFs, and bring them abroad.

“There is always a ‘home bias,’ (for investors), so it’s important to offer something ex- U.S. portfolios can use for international large cap equity exposure,” said Mark Roberts, managing director of research and development for Russell ETFs. “It’s a building block, so that people can take a view outside the U.S.”

The three new Russell Developed ex-U.S. factor ETFs will offer exposure to low beta, low volatility and high momentum stocks in 24 developed countries including Canada.

While ETFs industry-wide have risen in asset size amongst the market volatility, in comparison to some of the hard assets they mimic, Roberts insists that the launch of the new factor ETFs were not a consequence of the market, but rather an extension of the same domestic factor ETFs already launched.

“It’s a natural extension of our current offerings, we can’t take credit for great timing—we don’t try to time the market, but these ETFs will have a useful tool for investors given the volatility being seen outside the U.S,” Roberts told Markets Media, citing fiscal problems in the Euro zone, and a potential Greek debt default.

Moreover, the next generation of ETFs will not only provide exposure to the global markets, but will have more precise mandates.

“Nowadays, people don’t just want an ETF to track small cap growth, but they want to attract, small aggressive growth,” said Roberts. Such added details may be able to differentiate ETF products in a growing, saturated market.

“People have been looking for next generation of intelligent beta, and there’s a real utility via active strategies,” noted Greg Friedman, managing director of Russell’s global ETF product group. “But that’s not to say that there are any inherent, extra risks, as it’s been noted in the media. The implementation is no different than any other ETF.”

Within institutional demand, Russell foresees that such active ETFs will become more than merely placeholders, while searching for active managers, but not yet part of a core asset allocation model.

“Our next generation of products that provide a finer delineation of exposure can help meet their demands,” Roberts said.

The global series of low beta, low volatility and high momentum ETFs were constructed from a combination of Russell’s investment managers, and the portfolio construction and index methodology of Axioma, a provider of portfolio strategy implementation.

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