Reality Shares, an exchange-traded fund provider known for its dividend strategies and a blockchain fund, on Thursday launched a multifactor ETF based on a proprietary model from Fundstrat Global Advisors.
The Reality Shares Fundstrat DQM Long ETF (DQML) tracks a machine learning, rules-based index developed by Fundstrat, a New York City research boutique who’s research chief, Thomas Lee, was formerly J.P. Morgan’s top equity strategist.
The DQML fund, which is the first ETF based on a Fundstrat index, tracks the DQM Long Index that starts with a universe of the 500 largest U.S. stocks by market capitalization and ranks them by eight factor groups representing more than 40 individual fundamental and valuation factors that drive equity prices.
This process generates an aggregate score for each stock that represents the weighted sum of the group factor scores, and the index comprises the 100 highest-scoring large-cap stocks. The index is equally weighted and rebalanced quarterly.
“The key to any good multifactor model is that it’s dynamically allocating across the factors that are working, and then unweighting the factors that aren’t. And that’s what the DQML is all about—it’s a dynamic approach to factor investing,” says Eric Ervin, CEO of Blockforce Capital, the San Diego-based parent company of Reality Shares.
Reality Shares posits that its new DQML fund is designed to seek alpha with greater precision than existing factor-based ETFs, and as such can be included in the core U.S. large-cap blend component of a diversified portfolio
The fund’s expense ratio of 0.68 percent is higher than the average net expense ratio of roughly 50 basis points charged by smart beta, or strategic beta ETFs, according to Morningstar.
“Smart beta is systematizing the process of active management and putting it into an ETF wrapper with a better fee structure and more transparency,” Ervin says. “A fund like DQML should be compared with actively managed mutual funds and hedge fund strategies. Our fund’s fee is at the higher end of smart beta products, but roughly half of what actively managed mutual funds charge on average.”
Reality Shares and Fundstrat plan to collaborate on additional ETFs down the road. Ervin notes that Fundstrat has about 20 different versions of the underlying DQM model they offer to their institutional clients.
“There are lots of different ways to play that one basic model, so you could see a whole suite of ETFs delivering these exposures,” Ervin says. “A long/short fund would be the next logical approach to come from the DQM model.”