To better demonstrate the new Alpholio™ ETP Analysis Service in action, let’s analyze several of the iShares smart beta ETFs. The oldest of these products were introduced in mid-April 2013, so by now more than three years of performance data are available. According to their issuer

Smart beta ETFs can help investors achieve goals like reducing risk, generating income, or potentially enhancing returns. These funds primarily focus on factors – broad, persistent drivers of returns across equities and other asset classes. New technologies have made it easier to target factor exposures, which investors can access with iShares Edge ETFs.

Due to the scope of analysis, this post will be divided into two parts. We will start with the iShares Edge MSCI USA Size Factor ETF (SIZE). According to its issuer, this ETF provides

Exposure to large- and mid-cap U.S. stocks with a tilt towards the smaller, lower risk stocks within that universe

Here is a chart with related statistics of the cumulative RealAlpha™ for this ETF from May 2013 (the first full month of returns since its inception) through July 2016:

Cumulative RealAlpha™ for iShares Edge MSCI USA Size Factor ETF (SIZE)

The ETF returned effectively as much as its reference ETF portfolio that had a slightly lower volatility. The ETF’s RealBeta™, measured against a broad-based US equity index ETF, was close to one.

The following chart shows the constant composition of the reference ETF portfolio for the iShares Edge MSCI USA Size Factor ETF:

Reference Weights for iShares Edge MSCI USA Size Factor ETF (SIZE)

The ETF had equivalent positions in the SPDR Russell 3000® ETF (THRK), SPDR® Dow Jones® REIT ETF (RWR), SPDR® S&P® Insurance ETF (KIE), iShares U.S. Medical Devices ETF (IHI), IQ Hedge Multi-Strategy Tracker ETF (QAI), and Utilities Select Sector SPDR® Fund (XLU).

Over the same analysis period, SIZE outperformed THRK, the dominant position in its reference portfolio, in terms of a slightly larger annualized return, as well as higher Sharpe and Sortino ratios:

Total Return of iShares Edge MSCI USA Size Factor ETF (SIZE) and SPDR Russell 3000® ETF (THRK)

The average correlation between rolling 24-month returns of the two ETFs was 0.96.

The second smart beta ETF we will evaluate is the iShares Edge MSCI USA Value Factor ETF (VLUE). According to the issuer, this ETF supplies

Exposure to large- and mid-cap U.S. stocks with lower valuations based on fundamentals

Here is a chart with related statistics of the cumulative RealAlpha™ for this ETF:

Cumulative RealAlpha™ for iShares Edge MSCI USA Value Factor ETF (VLUE)

Since late 2014, the ETF failed to add value over its reference portfolio that had a slightly lower volatility. The ETF’s RealBeta™ was higher than that of a broad-based stock market ETF.

The following chart shows the fixed reference ETF portfolio for the iShares Edge MSCI USA Value Factor ETF:

Reference Weights for iShares Edge MSCI USA Value Factor ETF (VLUE)

The ETF had major equivalent positions in the SPDR® S&P® 500 Value ETF (SPYV), SPDR® Morgan Stanley Technology ETF (MTK), iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI), First Trust Large Cap Value AlphaDEX® Fund (FTA), iShares U.S. Healthcare Providers ETF (IHF), and iShares Transportation Average ETF (IYT). The Other component in the chart collectively represents two additional ETFs with smaller weights.

Although VLUE had a slightly higher annualized return than SPYV (the prevailing ETF in its reference portfolio), it underperformed SPYV in terms of both Sharpe and Sortino ratios:

Total Return of iShares Edge MSCI USA Value Factor ETF (VLUE) and SPDR® S&P® 500 Value ETF (SPYV)

The average correlation between rolling 24-month returns of the two ETFs was 0.98.

The second part of this post will cover two other iShares smart beta ETFs, the iShares Edge MSCI USA Momentum Factor ETF (MTUM) and iShares Edge MSCI USA Quality Factor ETF (QUAL).


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