Eight stocks joined the Invesco fund in November, replacing more volatile securities. Philip Morris International, rated by CFRA as a “strong buy,” joined with fellow S&P 500 sector constituents General Mills, Kimberly-Clark and Walmart in the Invesco low-volatility fund last month. Other names that were added to this smart-beta ETF included Ball Corporation, McDonalds and Waters Corp., the Rosenbluth said.
The iShares minimum volatility fund offers a different approach to lower risk investing. It “generally holds the least volatile stocks within a sector, while also incorporating optimizing tools to project the riskiness of the securities. [It] is reconstituted semi-annually, not quarterly, most recently at the end of November,” Rosenbluth said.
While the iShares version tends to have more exposure to defensive sectors than the broader U.S. equity market, it also has more exposure to growth-oriented sectors, such as information technology, than the Invesco low-volatility product, which can be seen in changes the ETF made this week.
Information technology (at 23% of assets) was the largest sector for the iShares minimum volatility fund, following a fractional increase before the rebalance. In contrast, the Invesco version has just 5.8% in the sector, down from 6.5% just before it was adjusted. Health care was a hefty weighting for both ETFs, but the iShares fund had 19%, less than Invesco’s 25%. But iShares had more utilities exposure, 7.7% while Invesco had only 4.3%.
On the energy front, the removal of ExxonMobil left the iShares low-volatility fund with just two small positions in the energy sector. The fund had a recent turnover rate of 23%, which also reflects the trimming of stocks such as Coca-Cola in November, Rosenbluth said.
Keeping track of international equity smart-beta ETFs is doubly complicated. “While investors in U.S. focused smart-beta ETFs want to be mindful of the sector exposures their funds provide, those owning an international-equity-focused fund need to also keep in mind that country weights can shift,” Rosenbluth added.
For instance, the WisdomTree International Quality Dividend Growth ETF, which combines two fundamental approaches—quality and dividend growth—significantly shifted toward Australia (an increase of nearly 700 basis points) and away from Spain (a decrease of more than 400 basis points) in November. Materials jumped by more than 800 basis points to 20%, while consumer staples fell by approximately 450 basis points to 10%. Mining companies BHP Group and Rio Tinto were added, while British American Tobacco and beverage company Diageo were removed. The WisdomTree fund recently had a 39% turnover rate, Rosenbluth said.
He added, “Even as investors increasingly use index-based ETFs to support long-term goals, we think it is important to regularly review how a fund is positioned to realize the exposure it currently provides. Index-based ETFs can and do change throughout the year.”