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What are we looking for?

Strategic beta ETFs for direct exposure to style-based investing.

The screen

Strategic beta or “smart” beta funds are those that straddle the line between active and passive management. These funds leverage quantitative investment techniques to remove much of the human element in investing, with the intent to gain exposure to a specific fundamental factor such as growth, value, quality, momentum, risk or dividends. Like passive investments, they typically charge lower fees than active managers but still provide an active tilt toward a specific investment style. As algorithm-driven strategies, these funds stay true to a specific approach, for better or worse. Of the 984 Canadian-domiciled exchange-traded funds, 196 of them are considered strategic beta products. To find a few reasonable ideas, I used Morningstar Direct to look for Canadian-domiciled strategic beta ETFs that have:

  • A Morningstar overall rating of four stars or better. Recall that this rating (also known as the “star” rating) is a historical look back at risk-adjusted returns after fees for each fund relative to category peers (which include both mutual funds and ETFs). Funds that have five stars have historically outperformed funds in the same category with four stars, three stars, etc.
  • A Morningstar Quantitative Rating of bronze, silver or gold. This rating is a forward-looking assessment of a fund’s prospective ability to outperform similar funds after fees, based on pillars of our analyst framework: people (the quality of management team); process (the effectiveness and consistency of the investment process); and parent (organizational structure and talent retention). Over the long term, gold, silver and bronze funds are expected to outperform neutral and negative funds after fees.

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.

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What we found

The funds that met the above requirements are listed in the table along with their fees and trailing returns. Two important dimensions are also included:

  1. The strategic beta group pinpoints the factor being targeted by the investment strategy. Quality strategies commonly target companies with high and stable levels of profitability, clean balance sheets, capital efficiency, return on assets, economic moats, etc. Risk-oriented strategies typically target low overall volatility of returns. Dividend-oriented strategies include those that screen a universe of stocks for dividend-paying firms, weighting stocks on the basis of dividend payments, screening on the basis of dividend growth, or isolating firms based on metrics that would indicate dividend stability. Growth strategies commonly look for above-average long-term projected earnings growth, historical earnings, sales and cash flow growth.
  2. The Morningstar category (or peer group) to which the fund belongs provides insight into the underlying holdings by regional exposure. Before investing in any fund, it is imperative to consider whether the category to which the fund belongs is appropriate to your long-term asset allocation and risk tolerance.

This article does not constitute financial advice. It is always recommended to speak to a financial adviser or professional before investing in any of the products shown below.

Select TSX-listed strategic beta ETFs

Exchange-traded fundTickerMorningstar CategoryStrategic Beta GroupMER (%)Morningstar Rating OverallMorningstar Quantitative RatingInception Date mm/dd/yyyyYTD Ttl. Rtn. (%)1Y Ttl. Rtn. (%)3Y Ann. Ttl. Rtn. (%)5Y Ann. Ttl. Rtn. (%)
iShares Canadian Growth ETFXCG-TCdn. EquityGrowth0.554 StarsGold11/6/20061.
BMO MSCI Europe Hi Qual Hdgd to CAD ETFZEQ-TEuro. EquityQuality0.455 StarsSilver2/10/2014-4.610.15.67.2
CI FirstAsset MSCI Eur LowRisk Wgt ETF HdgRWE-TEuro. EquityRisk-Oriented0.665 StarsSilver2/11/2014-11.7-
BMO MSCI All Country World High Qual ETFZGQ-TGlobal EquityQuality0.515 StarsBronze11/5/20144.421.811.512.5
iShares Edge MSCI Min Vol Glob ETF CADHXMY-TGlobal EquityRisk-Oriented0.484 StarsSilver4/5/2016-
iShares Edge MSCI Min Vol EAFE ETF CADHXML-TInt'l EquityRisk-Oriented0.374 StarsSilver4/5/2016-9.2-2.01.6n/a
CI WisdomTree US Qual Div Gr ETF Non-HdgDGR-B-TUS EquityDividend0.374 StarsSilver7/12/2016-2.412.48.7n/a
Vanguard US Dividend Appreciation ETFVGG-TUS EquityDividend0.304 StarsGold8/2/2013-0.511.09.711.5
BMO MSCI USA High Quality ETFZUQ-TUS EquityQuality0.335 StarsSilver11/5/20145.223.014.715.1
iShares Edge MSCI Min Vol USA ETFXMU-TUS EquityRisk-Oriented0.334 StarsSilver7/24/2012-

Source: Morningstar Direct.

Data as of June 2.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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