Analysis of John Hancock Multifactor ETFs
August 14, 2017
Analysis of Parnassus Core Equity Fund
In September 2015, John Hancock Investments launched six strategic (smart) beta John Hancock Multifactor ETFs, with underlying indexes designed by Dimensional Fund Advisors LP (DFA). By now, the product suite has grown to a total of twelve ETFs, three “core” and nine “sector” ones.
Traditionally, DFA mutual funds were available only through advisors operating within the company’s program. With John Hancock Multifactor ETFs, retail investors can access DFA strategies without paying an advisory fee, which is typically 1% of assets under management (AUM). However, since DFA offers a large selection of mutual funds, it is not clear which of them can be replaced by the ETFs.
Let’s start with the John Hancock Multifactor Large Cap ETF (JHML). To identify the best candidates for substitution, we will use the correlation of rolling 52-week returns (conventionally, we would use rolling 36-month returns, but John Hancock ETFs have insufficient history). Although high correlations do not imply product identity, there are a good starting point for further analysis. Here are the correlations of DFA core and large-cap funds with JHML:
Of the candidate funds, the DFA US Large Cap Equity Portfolio (DUSQX) and DFA US Large Company Portfolio (DFUSX) had the highest correlation with JHML. Let’s see what total returns and traditional statistics looked like for the candidate funds and the ETF:
Indeed, the performance of DUSQX and DFUSX was similar to that of JHML, although the volatility of the ETF was slightly lower than that of the funds.
Next, let’s take a look at the John Hancock Multifactor Mid Cap ETF (JHMM). DFA does not offer an explicitly-named mid-cap fund, so we will try the core and small-cap funds. Here are their correlations with JHMM:
Based on this criterion, the DFA US Core Equity 1 Portfolio (I) (DFEOX) and DFA US Core Equity 2 Portfolio (I) (DFQTX) were the best candidates for substitution.
The DFEOX tracked JMHH most closely, although at a lower annualized return and a slightly higher standard deviation.
Finally, let’s analyze the John Hancock Multifactor Developed International ETF (JHMD). This ETF was launched in mid-December 2016 and, as of this writing, does not have 52 weeks of history. Therefore, to determine its correlations with DFA International funds we will use a rolling 26-week period:
The DFA International Core Equity Portfolio (I) (DFIEX) and DFA International Large Cap Growth Portfolio (DILRX) had the highest correlations with the ETF. The ETF most closely tracked the former fund:
Although John Hancock Multifactor ETFs have a relatively short history, we have identified specific DFA mutual funds that these ETFs can effectively substitute. However, it should be noted that ETFs trade at market prices and not at net asset values (NAVs) as mutual funds do. Therefore, ETF premiums/discounts and spreads may negatively affect investors’ returns. Nevertheless, these ETFs are worth a consideration by those investors who like DFA’s multifactor strategies but do not want to pay recurring advisory fees to gain access to DFA mutual funds.
To learn more about the performance of John Hancock Multifactor sector ETFs, please register on our website.
July 31, 2017
Analysis of Alpha Architect ETPs
A recent story in The New York Times focused on Parnassus Investments and its Core Equity Fund (PRBLX; Investor Class shares). This $15.7 billion large-cap no-load fund has a reasonable 0.87% net expense ratio and 23% turnover. According to the article
Value-oriented investors who screen out companies that don’t meet strict social standards, [the fund managers], over the last year, generated a respectable 14 percent return in their core equity fund where they have large stakes in Apple and Google. But the positions are not nearly enough to keep pace with the 18 percent return of the Standard & Poor’s 500-stock index, within which six of the 10 top components are now technology stocks.
Over the longer term, however, the Parnassus results are better. For 10 years, the core equity fund handily beats its benchmark — 9 percent compared with 7 percent, a record that outpaces 98 percent of the competition.
This post is a follow-up to our previous coverage of this fund.
Let’s start with rolling returns. The fund’s primary prospectus benchmark is the S&P 500® Index. One of the long-lived implementations of this index is the SPDR® S&P 500® ETF (SPY). From January 2000 through June 2017, the fund returned more than the ETF in approximately 62% of all rolling 36-month periods, 56% of 24-month periods and 54% of 12-month periods. However, the dispersion of outcomes was quite wide, as shown in the following chart and statistics:
While a rolling returns analysis provides useful information about relative performance over typical holding periods, it does not take the fund’s exposures or risk into account. To more accurately adjust for the latter, let’s employ the simplest variant of Alpholio™ patented methodology. In this approach, a custom reference ETF portfolio is built for each analyzed fund to most closely track the fund’s returns. The portfolio has a fixed ETF membership (with a configurable limit) and weights, thus facilitating an easy implementation.
The following chart with associated statistics shows the cumulative RealAlpha™ for Parnassus Core Equity over the ten years through June 2017 (to learn more about this and other performance measures, please visit our FAQ):
Compared to the reference portfolio of up to six ETFs, the fund added a fair amount of value over this analysis period and did so with a RealBeta™ well below one.
The following chart with statistics depicts the constant composition of the reference ETF portfolio over the same evaluation period:
The fund had equivalent positions in the iShares MSCI KLD 400 Social ETF (DSI), Vanguard Consumer Staples ETF (VDC), PowerShares BuyBack Achievers™ Portfolio (PKW), iShares Morningstar Large-Cap Growth ETF (JKE), First Trust Water ETF (FIW), and iShares U.S. Energy ETF (IYE).
Now let’s take a look at the fund’s performance over the last five years. Here is the resulting cumulative RealAlpha™ chart with related statistics:
Since mid-2015, the fund lost all of the cumulative RealAlpha™ it previously generated in this analysis period. Also, despite lower volatility (measured by the standard deviation) the RealBeta™ of the fund was higher than that over the broader evaluation period.
The following chart with statistics illustrates the static composition of the reference ETF portfolio over five years:
The fund had equivalent positions in the PowerShares S&P 500® Quality Portfolio (SPHQ), iShares MSCI USA ESG Select ETF (SUSA; formerly KLD), SPDR® S&P® Dividend ETF (SDY), iShares U.S. Industrials ETF (IYJ), Technology Select Sector SPDR® Fund (XLK), and Consumer Staples Select Sector SPDR® Fund (XLP).
The final chart with conventional statistics shows the total return of the fund and two of the reference ETFs:
Over the five-year period, the performance of the two ETFs, and especially DSI, converged with that of the fund.
In sum, while the Parnassus Core Equity Fund has a decent long-term record, its recent performance has been similar to that of index-based environmental, social and governance (ESG) products with lower expense ratios. With approximately 40 positions, the fund’s portfolio is fairly concentrated – top ten holdings currently constitute almost 39% of the total. In three of the last four calendar years, the fund had significant distributions, which made it less suitable for taxable accounts.
To learn more about the Parnassus Core Equity and other mutual funds, please register on our website.
June 3, 2017
Analysis of RBC Emerging Markets Equity Fund
A recent article in The Wall Street Journal profiles the CEO of Alpha Architect LLC, an upstart active investment manager. The firm currently advises five exchange-traded products (ETPs). Four of these ETPs have a sufficiently long history to be analyzed using Alpholio™’s patented methodology.
All of the following analyses employ the simplest variant of the methodology. For each analyzed ETP, the variant constructs a reference portfolio of up to six ETFs that most closely tracks periodic returns of the ETP. Both the membership and weights of ETFs in the reference portfolio are fixed over the entire analysis period.
Let’s start with the ValueShares U.S. Quantitative Value ETF (QVAL). Here is a chart of the cumulative RealAlpha™ for this ETP (to learn more about this and other performance measures, please visit our FAQ):
The ETP produced a significantly lower cumulative return than that of its reference ETF portfolio. It also had a higher volatility due to a relatively small number of deep-value holdings. This was also reflected in a considerably elevated RealBeta™, assessed against a broad-based domestic equity ETF.
The following chart with statistics shows the fixed composition of the reference ETF portfolio for QVAL:
The ETP had equivalent positions in the First Trust Large Cap Value AlphaDEX® Fund (FTA), SPDR® S&P® Retail ETF (XRT), PowerShares S&P SmallCap Information Technology Portfolio (PSCT), iShares North American Tech-Multimedia Networking ETF (IGN), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), and iShares U.S. Oil Equipment & Services ETF (IEZ). These ETFs correspond to average exposures QVAL generated over the evaluation period.
Let’s move on to the ValueShares International Quantitative Value ETF (IVAL). Here is a chart of cumulative RealAlpha™ with statistics for this ETP:
The ETP added significantly more value than its reference ETF portfolio, but only beginning in the second half of last year. This is why the article singles out a recent outperformance of just this product:
…value-focused fund of overseas stocks is beating all its rivals over the past year.
The ETP produced this excess return at the expense of a substantially higher volatility than that of its reference ETF portfolio.
The following chart with associated statistics illustrates the static composition of the reference ETF portfolio for IVAL:
The ETP had equivalent positions in the WisdomTree Japan Hedged Equity Fund (DXJ), Guggenheim CurrencyShares® Australian Dollar Trust (FXA), iShares MSCI South Korea Capped ETF (EWY), iShares MSCI Spain Capped ETF (EWP), WisdomTree Japan SmallCap Dividend Fund (DFJ), and iShares MSCI Germany ETF (EWG).
Next, let’s take a look at the MomentumShares U.S. Quantitative Momentum ETF (QMOM). Here is a chart of the cumulative RealAlpha™ with statistics for this ETP:
The ETP failed to outperform its reference ETF portfolio of somewhat lower volatility.
The following chart with related statistics depicts the constant composition of the reference ETF portfolio for QMOM:
The ETP had equivalent positions in the PowerShares DWA Industrials Momentum Portfolio (PRN), Global X Social Media ETF (SOCL), aforementioned DFJ, PowerShares NASDAQ Internet Portfolio (PNQI), PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ), and PowerShares DWA SmallCap Momentum Portfolio (DWAS).
Finally, let’s evaluate the MomentumShares International Quantitative Momentum ETF (IMOM). Here is the cumulative RealAlpha™ chart with statistics for this ETP:
The ETP significantly underperformed its reference ETF portfolio in terms of both the cumulative return and volatility. However, its RealBeta™ was well below that of the market.
The following chart with accompanying statistics shows the invariant composition of the reference ETF portfolio for IMOM:
The ETP had equivalent positions in the iShares Mortgage Real Estate Capped ETF (REM), VanEck Vectors Vietnam ETF (VNM), iShares U.S. Medical Devices ETF (IHI), aforementioned FXA, Guggenheim CurrencyShares® Japanese Yen Trust (FXY), and aforementioned SOCL.
It should be noted that all of the above ETPs except for QVAL have traded at a considerable premium to their net asset value (NAV). For example, as of this writing, IMOM’s one-year price return was 8.50% compared to a 3.10% NAV return. Such pricing discrepancies could partially explain the presence of REM (a domestic real-estate fund) and IHI (a domestic medical device fund), in the reference ETF portfolio for IMOM.
In sum, the majority of Alpha Architect ETPs have so far delivered unimpressive results after a comprehensive adjustment for volatility and exposures. Since the oldest product has less than three years of history, only time will tell whether the performance of these ETPs vs. their reference ETF portfolios will eventually improve. The challenge of any factor investing, including value and momentum, is not only the cyclical variation of performance but also the selection of individual securities to implement the factor.
To learn more about the Alpha Architect and other ETPs, please register on our website.
May 2, 2017
Analysis of Metropolitan West Total Return Bond Fund
A recent piece in Barron’s features the RBC Emerging Markets Equity Fund (REEAX; Class A shares). This $328 million fund has a 5.75% maximum sales charge, 1.14% expense ratio and 19% turnover. According to the article
The RBC fund […] beat its benchmark MSCI Emerging Markets index over the past three years, returning an average 4.9% annually.
One of the long-lived implementations of the fund’s benchmark is the iShares MSCI Emerging Markets ETF (EEM). Alpholio™ calculations show that since inception, the fund returned more than the ETF in 75% of all rolling 12-month periods (the fund’s history is too short to draw meaningful conclusions from the fewer 24- and 36-month rolling periods).
The fund underperformed the ETF in the last seven of the total 28 annual rolling periods.
While useful, such a rolling return comparison provides a limited insight into the fund’s performance. In particular, it does not take into account the exposures or volatility of the fund. To gain more information, let’s apply Alpholio™’s patented methodology. In its simplest variant, it constructs a reference ETF portfolio with fixed membership and weights to most closely track periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for RBC Emerging Markets Equity (to learn more about this and other performance measures, please visit our FAQ):
The fund’s cumulative RealAlpha™ peaked in December 2014. Over the entire evaluation period, the fund failed to add value over its reference ETF portfolio, which had a comparable volatility.
The following chart with associated statistics shows the constant composition of the reference ETF portfolio for the fund over the same analysis period:
The fund had equivalent positions in the iShares Asia 50 ETF (AIA), iShares Emerging Markets High Yield Bond ETF (EMHY), iShares MSCI India ETF (INDA), Columbia Emerging Markets Consumer ETF (ECON), and BLDRS Emerging Markets 50 ADR Index Fund (ADRE).
The final chart with related statistics illustrates the performance of the fund and its dominant equivalent position, the aforementioned AIA:
While the fund had a lower volatility, its return, Sharpe and Sortino ratios were below those of the ETF.
Over its relatively short history, the RBC Emerging Markets Equity Fund delivered an unimpressive performance after adjustment for exposures. A steep front load further detracts from the fund’s appeal. Only time will tell whether the fund’s focus on long-term earnings of its holdings produces better results.
To learn more about the RBC Emerging Markets Equity and other mutual funds, please register on our website.
April 4, 2017
A recent piece in Barron’s profiles the Metropolitan West Total Return Bond Fund (MWTRX; M Class shares). This $78.6 billion no-load fixed-income fund has a 0.66% expense ratio and 303% turnover. According to the article
In the past 15 years, the fund has delivered a 5.7% annualized return.
The fund’s prospectus benchmark is the Bloomberg Barclays US Aggregate Bond Index. One of the long-lived and accessible implementations of this index is the iShares Core U.S. Aggregate Bond ETF (AGG). Given the change of the famous lead manager in December 2009, it would not make sense to evaluate the fund’s relative performance before that time. Alpholio™ calculations indicate that from January 2010 through February 2017 the fund returned more than the ETF in approximately 78% of all rolling 36-month periods, 71% of 24-month periods and 52% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 7.1%.
A rolling returns comparison does not take into account the fund’s volatility or exposures. This is where Alpholio™’s patented methodology comes in. In its simplest variant, it constructs a reference ETF portfolio with fixed membership and weights that most closely tracks periodic returns of the analyzed fund. To make substitution practical, in the following analyses the number of ETFs in the reference portfolio was limited to no more than four. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Metropolitan West Total Return over the five years through February 2017 (to learn more about this and other performance measures, please consult the FAQ):
The fund added a significant amount of RealAlpha™ through 2014. However, subsequently the cumulative RealAlpha™ curve flattened out. The fund’s volatility, measured as the standard deviation of monthly returns, was higher than than of the reference ETF portfolio. Due to a slightly negative correlation between bond and stock returns, the fund’s RealBeta™ was just below zero.
The following chart with statistics shows the constant reference ETF portfolio for the fund over the same evaluation period:
The fund had equivalent positions in the Schwab U.S. Aggregate Bond ETF™ (SCHZ), iShares 1-3 Year Credit Bond ETF (CSJ), and FlexShares iBoxx® 5-Year Target Duration TIPS Index Fund (TDTF).
Let’s take a closer look at the more recent performance of the fund. Here is the cumulative RealAlpha™ chart with statistics for the past three years:
The fund failed to add value relative to its reference ETF portfolio, which had a slightly higher volatility. One of the reasons may have been the sudden inflow of over $31 billion following the departure of a prominent lead manager of a competing fund.
The following chart with statistics shows the composition of the reference ETF portfolio over the three-year period:
The fund had equivalent positions in the Vanguard Total Bond Market ETF (BND), Vanguard Mortgage-Backed Securities ETF (VBMS), and iShares MBS ETF (MBB).
Due to its large size, the Metropolitan West Total Return Bond Fund may find it difficult to outperform on a truly risk-adjusted basis. As the last analysis demonstrated, investors may be better off by replacing the fund with a simple portfolio of bond ETFs.
To learn more about the Metropolitan West Total Return Bond and other mutual funds, please register on our website.