A Trio Of Venerable Smart Beta ETFs

Call them smart beta or strategic beta exchange traded funds. Whatever the lingo is, what is not up for argument is the swelling popularity of this ETF genre.

Since 2012, the annualized growth rate for smart beta ETFs is 40 percent, double the growth of the ETF industry at large. That growth is continuing in 2015 despite some outflows from dividend ETFs, the very funds that led the growth of strategic beta ETFs in recent years.


The SPDR S&P Dividend ETF SDY, one of the four largest U.S. dividend ETFs, is one of the more established, well-known names in the smart beta realm.

SDY “tracks the S&P 1500 Dividend Aristocrats index. That index currently consists of 100 companies that have raised their dividends annually for 20-or-more consecutive years. Valuation is not relevant for continued inclusion, but companies are reconsidered annually based on their dividend growth history. The ETF has a 0.35% net expense ratio. Despite outflows in 2015, SDY has $13 billion in assets,” according to a recent S&P Capital IQ research note.

Related Link: Back To The Future With A Dividend ETF

SDY has some advantages and drawbacks. The dividend increase requirement ensures investors can rely on steadily rising income from the ETF over time, but SDY weights its 102 holdings. That can be a downer at a time when Treasury yields are rising. Even with the yield weighting, SDY has a low weight to telecom stocks and, fortunately, the ETF is light on the sagging energy sector, home to the most S&P 500 dividend cuts and suspensions this year.


Fast approaching its 10-year anniversary, the PowerShares S&P 500 High Quality Portfolio SPHQ is another one of the more established names among strategic beta ETFs.

“Companies inside SPHQ have above-average S&P Capital IQ Quality Rankings, a metric based on consistently growing earnings and dividends over a ten-year period,” said S&P Capital IQ.

SPHQ's underlying index “is designed to provide exposure to the constituents of the S&P 500 Index that are identified as stocks reflecting long-term growth and stability of a company's earnings and dividends,” according to PowerShares.

Industrials, consumer staples and consumer discretionary stocks combine for nearly two-thirds of SPHQ's weight. Investors have added over $28 million to the ETF this year.


Just over two years old, the iShares MSCI USA Quality Factor ETF QUAL is one of the newer kids on the smart beta block, so it is impressive that this is now a $1.1 billion ETF. Equally as impressive is that about a third of those assets have flowed into the fund just this year.

The MSCI index behind this ETF consists of companies with high return on equity, stable year-over-year earnings growth, and low financial leverage. QUAL has a 0.15% net expense ratio and is rebalanced semi-annually,” according to S&P Capital IQ.

In QUAL's case, quality means a hefty weight to technology names. The sector is almost 35.2 percent of the fund's weight and six of QUAL's top 10 holdings are tech stocks. Another interesting element to QUAL's definition of quality is what sectors the ETF does not embrace.

For example, the ETF, which has a beta of 0.97, holds no utilities stocks and allocates less than seven percent of its combined weight to energy and financial services names.

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