Market Vectors unveils factor-based smart beta ETFs

Jan 24th, 2014 | By | Category: Equities

Market Vectors, a US-based provider of exchange-traded funds, has entered the smart beta space with the launch of four ETFs powered by factor-based indices from MSCI.

Market Vectors unveils factor-based smart beta ETFs

Market Vectors has launched four new ETFs, powered by factor-based indices from MSCI. They focus on international and emerging markets quality and quality dividend stocks.

The new ETFs, which have been listed on the NYSE Arca, enable investors potentially to access the extra returns historically associated with active factor-based strategies in an index-based, cost-efficient format.

Two of the funds, the Market Vectors MSCI International Quality ETF (QXUS) and Market Vectors MSCI Emerging Markets Quality ETF (QEM), target the “quality growth” factor. Quality growth companies tend to have high returns on equity (ROE), stable earnings that are uncorrelated with the broad business cycle, and strong balance sheets with low financial leverage.

These companies are identified by calculating a quality score for each security in the eligible equity universe based on three main fundamental variables: high ROE, stable year-over-year earnings growth and low financial leverage. Constituents are weighted by a function of their quality score and market capitalization.

The second two funds, the Market Vectors MSCI International Quality Dividend ETF (QDXU) and Market Vectors MSCI Emerging Markets Quality Dividend ETF (QDEM), target the “quality dividend” factor. These funds comprise those securities in the eligible equity universe that have higher-than-average dividend yields, a track record of consistent dividend payments and the capacity to sustain future dividend payments.

A “quality” screen is additionally applied to these funds, based on factors such as ROE, earnings variability, and debt to equity, in order to omit stocks with potentially deteriorating fundamentals that could force them to cut or reduce dividends.

Amrita Bagaria, International Equity ETF Product Manager with Market Vectors, said: “Quality matters. Quality as an investment factor has historically outperformed broad international and emerging markets equities with relatively lower volatility over long time periods, but until now, a quality-focused, factor-based approach has usually been accessible only through active strategies. We’re very excited to introduce these quality factor ETFs to the broad investment marketplace, and we are particularly pleased to be partnering with MSCI, a global leader in international indexing.”

Diana Tidd, Managing Director and Head of the MSCI Index Business in the Americas, commented: “Holdings in both indexes [MSCI ACWI ex USA Quality Index and MSCI Emerging Markets Quality Index] are screened for historically high return on equity, stable annual earnings growth and low financial leverage. Our research suggests that the quality growth companies have high ROE, low financial leverage and stable earnings that are uncorrelated with the broad business cycle and may provide diversification benefits in portfolio allocation.”

She added: “Constituents in MSCI’s high dividend yield indexes [MSCI ACWI ex USA High Dividend Yield Index and MSCI Emerging Markets High Dividend Yield Index] are quality growth companies offering a higher dividend yield relative to their respective Parent index and with a track record of providing sustainable and consistent dividend payouts.”

The funds underlying indices and expense ratios are as follows:

Market Vectors MSCI International Quality ETF (QXUS)
MSCI ACWI ex USA Quality Index
Net expense ratio 0.45 percent

Market Vectors MSCI Emerging Markets Quality ETF (QEM)
MSCI Emerging Markets Quality Index
Net expense ratio 0.50 percent

Market Vectors MSCI International Quality Dividend ETF (QDXU)
MSCI ACWI ex USA High Dividend Yield Index
Net expense ratio 0.45 percent

Market Vectors MSCI Emerging Markets Quality Dividend ETF (QDEM)
MSCI Emerging Markets High Dividend Yield Index
Net expense ratio 0.50 percent

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