Deutsche Asset & Wealth Management (Deutsche AWM) has listed a range of strategic beta exchange-traded funds on the London Stock Exchange that provide investors with equity factor exposure.

Martin Weithofer, managing director and head of strategic beta at Deutsche AWM.

The new ETFs, which debuted on the Deutsche Börse last month, provide exposure to the following established equity factors: value, quality, momentum and low beta.

The ETFs are physical replication funds and provide a long-only tilt towards their equity factor, with stocks selected on a global basis.

Strategic beta – also commonly termed ‘smart beta’ – is an approach to investment that involves breaking down market risk and return into a number of component parts, or factors, with strategies put in place to take exposure to those factors.

The approach has gained credence as a strategic beta strategy post the credit crunch, when many investors found that portfolios established on a geographic and asset class basis were notably more correlated at a time of crisis than had been expected. This led some large pension funds, seeking reliable diversification, to fundamentally change the nature of their asset portfolios in order to invest using a risk factor-based approach.

Analysis also suggests that certain individual factor exposures, and portfolios of factor exposures, may provide better risk-adjusted performance in the long term compared with traditional ‘core beta’.

Martin Weithofer, head of strategic beta at Deutsche AWM, commented: “Factor-based investing is moving from being a niche investment practice into the mainstream, and the launch of our strategic beta ETFs puts us in a strong position to meet this growing demand.”

The funds, which each come with a total expense ratio of 0.25%, are detailed below:

db x-trackers Equity Quality Factor UCITS ETF (DR) (XDEQ)
Linked to the DB Equity Quality Factor Index, the ETF is designed to outperform the equity market (represented by the MSCI World Index), through a quality-based investment strategy. The index selects constituents from shares of large and medium sized companies across approximately 31 developed market countries. The shares are selected using a quality-based strategy which analyses the quality of companies’ earnings. This strategy is based on the assumption that at certain times companies with high quality earnings outperform, and companies with lower quality earnings underperform, the equity market generally. The strategy uses a rules-based formula to analyze the shares comprising the MSCI World Index and calculates a “quality score” for each share, based on a combination of return on invested capital (ROIC) and accruals. Index constituents will be selected from the shares comprising the MSCI World Index with an aim to overweight shares displaying a higher quality score and underweight shares with a lower quality score. ROIC relates net income before dividends and debt interest, after taxes, to the previous year’s total capital and short-term debt and the current year’s long-term debt. Accruals measure periodic performance by matching expenses with associated revenues.

db x-trackers Equity Value Factor UCITS ETF (DR) (XDEV)
Linked to the DB Equity Value Factor Index, the ETF is designed to outperform the equity market (represented by the MSCI World Index), through a value-based investment strategy. The index selects constituents from shares of large and medium sized companies across approximately 31 developed market countries. The shares are selected using a value-based strategy which analyses the value of companies’ shares. This strategy is based on the assumption that at certain times undervalued shares outperform and overvalued shares underperform the equity market generally. The strategy uses a rule-based formula to analyze the shares comprising the MSCI World Index and calculates a “value score” for each share, based on a combination of operational yield and dividend yield. Index constituents will be selected from the shares comprising the MSCI World Index with an aim to overweight shares displaying a higher value score and underweight shares with a lower value score. Operational yield shows whether a company is over or under-valued – the lower a company is valued compared to earnings, the higher its operational yield. Dividend yield shows how much a company pays out in dividends each year relative to its current share price.

db x-trackers Equity Momentum Factor UCITS ETF (DR) (XDEM)
Linked to the DB Equity Momentum Factor Index, the ETF is designed to outperform the equity market (represented by the MSCI World Index), through a momentum-based investment strategy. The index selects constituents from shares of large and medium sized companies across approximately 31 developed market countries. The shares are selected using a momentum-based strategy which analyses the price of companies’ shares. This strategy is based on the assumption that at certain times a company’s rising share prices continues to rise and a company’s falling share price continues to fall. The strategy uses a rules-based approach to analyze the shares comprising the MSCI World Index and calculates a “momentum score” for each share based on share price performance and dividends distributed over the past twelve months. Index constituents will be selected from the shares comprising the MSCI World Index with an aim to overweight shares displaying a higher momentum score and underweight shares with a lower momentum score. Momentum relies on continuing upward or downward market trends. Risk adjustments in the momentum score aim to reduce the negative impact of sudden shifts on the basis that lower volatility stocks tend to be less likely to be subject to sudden price trend reversals.

db x-trackers Equity Low Beta Factor UCITS ETF (DR) (XDEB)
Linked to the DB Equity Low Beta Factor Index, the ETF is designed to outperform the equity market (represented by the MSCI World Index) through a low beta-based investment strategy. The index selects constituents from shares of large and middle sized companies across approximately 31 developed market countries. The shares are selected using a low beta-based strategy which analyses the beta of each equity (which is calculated against an equal-weighted version of the MSCI World Index).This strategy is based on the assumption that in certain market cycles, low-beta equities outperform high-beta equities. The strategy uses a rules based approach to analyze the shares comprising the MSCI World Index and identifies low-beta and high-beta equities. Index constituents will be selected from the shares comprising the MSCI World Index with an aim to overweight those shares that display the lowest beta and underweight those that have the highest beta. An investment’s beta is a measure of the risk arising from exposure to general market movements. Low beta can indicate an investment with a volatility level lower than the market, or similar to the market, but with price movements not highly correlated with the market; high beta the opposite.