O’Shares Investments launches smart beta ETF targeting quality income
Jul 30th, 2015 | By John Maher, CFA | Category: Latest news
Boston-based investment manager O’Shares Investments has launched its debut ETF, the O’Shares FTSE US Quality Dividend ETF (OUSA), a multi-factor smart beta equity strategy targeting high-yielding, quality companies.
Through a combination of factor exposures (quality, low volatility and dividend yield), the ETF aims to deliver enhanced returns, lower volatility and provide a sustainable yield.
Designed as a core equity holding, the ETF is based on the FTSE US Qual / Vol / Yield Factor 5% Capped Index and marks the first in a series of ETFs O’Shares will be launching in partnership with index provider FTSE Russell.
“We believe now is an excellent time to provide individual and institutional investors with a set of efficient, transparent and cost effective index-based investment products that reflect our core investment principles. So we joined forces with leading global index provider FTSE Russell to launch our family of global index-based ETFs,” said O’Shares Chairman Kevin O’Leary.
Ron Bundy, CEO Benchmarks North America for FTSE Russell, added: “We are seeing growing demand in the investment community for more sophisticated indexes that can tap into market exposures efficiently and, in many cases, combine multiple factors. We are excited to introduce factor indexes that help clients like O’Shares target the specific exposures they seek.”
The ETF addresses the shortcoming of strategies based on dividend yield alone, which overlook the ability of the underlying companies to continue paying dividends. Through the introduction of a quality screen, the O’Shares fund seeks to avoid these higher risk companies. The quality screen assesses company profitability and leverage to identify those with the ability to generate strong future cash flows. This is complemented by tilting the portfolio towards low volatility stocks, measured by the standard deviation of their price movements. The result is a portfolio which assesses risk on two dimensions, fundamentals and returns.
O’Leary added: “As an investor, I want more income and less risk than in a generic index, and I want strong long-term performance. I strongly believe that OUSA has the potential to provide just that.”
By combining quality, low volatility and dividend yield factors the ETF should achieve diversification benefits compared to single factor products. Over long-term time periods these factors have historically provided risk and return enhancements versus market cap-weighted indices; however, the individual factors go through periods of relative underperformance. As the correlation between each factor has historically been low, combining multiple factors should smooth the time-varying nature of performance.
The fund provides exposure to a portfolio of large-cap and mid-cap US equities. As of June 23, 2015, the index included 140 stocks, selected from the parent FTSE USA Index, comprised of 600 of the largest US publicly-listed equities with an average weighted market capitalisation of $56 billion and a minimum market capitalisation of over $750 million. Individual index constituent weights are capped at 5% on a quarterly basis to avoid over-concentration in any single security.
The ETF has been listed on the NYSE Arca exchange and carries a gross expense ratio of 0.56%. O’Shares will be releasing four more ETFs based on the same methodology. These funds will be based on the Europe and Asia-Pacific equity universe and will be available in unhedged and US dollar-hedged versions.
Before you invest in O’Shares Investments℠ funds, please refer to the prospectus for important information about the investment objectives, risks, charges and expenses. To obtain a prospectus containing this and other important information, please visit www.oshares.com to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing including the possible loss of principal.
Concentration in a particular industry or sector will subject the Funds to loss due to adverse occurrences that may affect that industry or sector. The funds may use derivatives which may involve risks different from, or greater than, those associated with more traditional investments. The funds' emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund's purchase of such a company's securities. Returns on investments in foreign securities could be more volatile than, or trail the returns on, investments in U.S. securities. Exposures to foreign securities entail special risks, including political, diplomatic, economic, foreign market and trading risks. In addition, unless perfectly hedged, the Fund’s investments in securities denominated in other currencies could decline due to changes in local currency relative to the value of the U.S. dollar, which may affect the Fund’s returns. The funds' hedging strategies may not be successful, and even if they are successful, the funds' exposure to foreign currency fluctuations is not expected to be fully hedged at all times. See the prospectus for specific risks regarding the Fund.
The securities of small capitalization companies are often more volatile and less liquid than the stocks of larger companies and may be more affected than other types of securities during market downturns. Compared to larger companies, small capitalization companies may have a shorter history of operations, and may have limited product lines, markets or financial resources.
Past performance does not guarantee future results. Shares are bought and sold at market price (not NAV), are not individually redeemable, and owners of the Shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, consisting of 50,000 Shares. Brokerage commissions will reduce returns.
O’Shares Investments℠ funds are distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC is not affiliated with O’Shares Investments℠ or any of its affiliates.