Russell launched another suite of Factor ETFs on November 3, 2011, this time targeting international developed markets. Russell Developed ex-U.S. High Momentum ETF (XHMO), Russell Developed ex-U.S. Low Beta ETF (XLBT), and Russell Developed ex-U.S. Low Volatility ETF (XLVO) all use the same basic approach as Russell’s U.S. large cap and small cap Factor ETFs. The previous group, launched 5/27/2011, also included High Volatility and High Beta funds.
Index Construction Methodology
Each of the new ETFs uses the same basic index methodology, which can be briefly summarized as:
- The stocks from the Russell Developed ex-U.S. Large Cap Index are separately ranked by each of the three factors (low beta, low volatility, and momentum), creating a total of three rankings.
- Starting with the highest ranked stock for a specified factor, three “target portfolios” are created by adding the next-highest ranked stock until the target portfolio includes 35% of capitalization in the specified universe.
- Each fund’s underlying index then selects a portfolio of up to 400 stocks to optimally track the returns of the target portfolio while managing turnover and neutralizing exposure to the other factors.
- Each underlying index is then reconstituted monthly to maintain focus on the desired factor.
Overview of New ETFs
Expense ratios for the new ETFs are capped at 0.25%. Unlike the MSCI EAFE index of developed markets, the Russell Developed ex-U.S. Large Cap Index also includes Canada.
The same prospectus (pdf) describes all three funds in great detail. Here are brief descriptions of each.
Russell Developed ex-U.S. High Momentum ETF (XHMO) – the underlying Russell-Axioma Developed ex-U.S. Large Cap High Momentum Index attempts to track stocks from the Russell Developed ex-U.S. Large Cap Index with high momentum based on their cumulative return over the past 250 trading days but excluding the most recent 20 trading days. XHMO currently holds 304 stocks including British American Tobacco 2.1%, Vodafone Group 2.0%, and Novo Nordisk 1.9%. Largest country allocations are to the U.K. 25.7%, Japan 20.4%, and Canada 17.6% (XHMO overview and top holdings).
Russell Developed ex-U.S. Low Beta ETF (XLBT) – the underlying Russell-Axioma Developed ex-U.S. Large Cap Low Beta Index attempts to track stocks from the Russell Developed ex-U.S. Large Cap Index with low “predicted beta.” Beta is a measure of a stock’s the sensitivity to changes in a base index. XLBT currently holds 307 stocks including British American Tobacco 2.1%, Nestle 2.1%, and Vodafone Group 2.0%. Largest country allocations are to Japan 33.3%, Switzerland 13.9%, and the U.K. 12.2% (XLBT overview and top holdings).
Russell Developed ex-U.S. Low Volatility ETF (XLVO) – the underlying Russell-Axioma Developed ex-U.S. Large Cap Low Volatility Index attempts to track stocks from the Russell Developed ex-U.S. Large Cap Index with low volatility based on their variability in total returns over the last 60 days. XLVO currently holds 338 stocks including Royal Dutch Shell 2.0%, Nestle 2.0%, and Vodafone Group 2.0%. Largest country allocations are Japan 24.6%, U.K. 24.5%, and Canada 11.9% (XLVO overview and top holdings).
I believe the three funds are more different than the apparent overlap of their top holdings may suggest. Since each ETF holds more than 300 stocks, the “current” allocations tend to favor the stocks that have performed best since the last rebalancing. Additionally, given the current market volatility, the past year’s “high momentum” stocks also tended to be the lower volatility and lower beta stocks.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.