Analysis of John Hancock Multifactor ETFs
analysis, correlation, exchange-traded fund, factor investing, financial adviser, mutual 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:

Correlations of DFA Large-Cap Funds with John Hancock Multifactor Large Cap ETF (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:

Total Return of DFA Large-Cap Funds and John Hancock Multifactor Large Cap ETF (JHML)

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:

Correlations of DFA Core and Small-Cap Funds with John Hancock Multifactor Mid Cap ETF (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.

Total Return of DFA Core Funds and John Hancock Multifactor Mid Cap ETF (JHMM)

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:

Correlations of DFA International Funds with John Hancock Multifactor Developed International ETF (JHMD)

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:

Total Return of DFA International Funds and John Hancock Multifactor Developed International ETF (JHMD)

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.


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Trust Goes Down, Fees Go Up
active management, financial adviser

InvestmentNews reports that an annual survey of retail investors by State Street found that only 15% (down from about 33% last year) of respondents trust financial advisers as a group. The key issues are: performance, unbiased and high-quality advice, and transparency. Apparently, investors…

…don’t believe the fees they’re paying are commensurate with the return on their investments.

Granted, the lack of trust is evidently coupled with a lack of understanding of the finance industry or a sufficient interest in investments. However, the chief issue of performance remains.

So, how to fix this problem? By increasing fees, of course. That is what Bank of America just did by planning to raise fees on its managed-account (flat-fee) platforms at Merrill Lynch.

The current minimum fee schedule for equities on the most popular Merrill Lynch Personal Advisor (MLPA) platform with $152B under management is:

Assets Under Annual Fee
$1M 1.00%
$2M 0.65%

The new rate schedule will be:

Assets Under Annual Fee
$250k 1.6%
$500k 1.4%
$1M 1.3%
$2M 1.0%

Therefore, MLPA clients will face fee increases of 54-60%. Over 14,000 ML advisers have to implement that change by the end of 2015; the only way to reduce the fee hike for clients will be to cut their own compensation. Naturally, ML advisers are worried. So should be the clients. Luckily, Alpholio™ can easily show these investors whether advisers earn their fees by generating a sufficient RealAlpha™ on the managed accounts.

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