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New Smart Beta Entrants Were Ahead of S&P 500

In the second half of 2015, four traditional mutual fund management firms either initially entered the ETF market or expanded their small product lineup. All four firms' ETF offerings use an alternatively weighted approach, commonly known as smart beta, to compete against the more established market-cap weighted industry heavyweights such as SPDR S&P 500 (SPY). The diversified U.S. equity ETFs from these firms all outperformed SPY in the first quarter.

The strongest asset gatherer of the quartet was Goldman Sachs (GS). Since its September 2015 launch, Goldman Sachs ActiveBeta US LargeCap Equity (GSLC) pulled in $424 million in assets through the end of the first quarter; $464 million as of April 15. Interestingly, inflows into GSLC have been steady in the seven months since its inception even during months when the ETF declined in value. The ETF's 0.09% expense ratio is equal to that of SPY. We think a competitive expense ratio helped GSLC's 1.6% gain in the first quarter exceed the 1.3% for SPY.

GSLC and other relatively low-cost, passively managed Goldman ETFs screen companies based on four fundamental factors: value, quality, momentum, and low volatility. Criteria include book-value and sales-to-price, gross profit-divided-by-total-assets, price performance, and 12-month standard deviation. These ETFs are rebalanced on a quarterly basis.

GSLC and other relatively low-cost, passively managed Goldman ETFs screen companies based on four fundamental factors: value, quality, momentum, and low volatility.
 JPMorgan Diversified Return US Equity (JPUS) screens stocks based on value (using price-to-book), momentum (12 month return/standard deviation), and quality (return on equity) criteria. Sectors and stocks are weighted inversely by volatility. JPUS had $33 million in assets as of the end of first quarter. JPUS's 4.3% total return in the first quarter was the strongest of quartet; the ETF has a 0.29% expense ratio.

For its diversified U.S. and sector-specific ETFs, John Hancock partnered with Dimensional Fund Advisors (DFA), a global asset manager, to design the underlying indices. The firm emphasizes smaller cap companies with relatively low valuations and high profitability. The ETFs are reconstructed and rebalanced on a semi-annual basis. John Hancock MultiFactor LargeCap ETF (JHML) was the largest of the firm's ETFs, with $21.4 million in assets. JHML had a first quarter 1.8% return and has a 0.35% net expense ratio.

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 Unlike the other new entrants into the ETF world, Legg Mason (LM) does not screen stocks for its diversified core ETFs such as Legg Mason US Diversified Core (UDBI). Rather stocks in the parent index are grouped into industries, and the industries are evaluated based on correlations to one another and placed into clusters. Each cluster receives equal weighting and is rebalanced on a quarterly basis.

UDBI, which has a 0.30% net expense ratio, was up 3.7% in the first quarter.

Follow me @ToddSPGlobal to keep up with mutual fund and ETF trends.

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