The Russell 3000, which covers roughly 99% of the U.S. stock market, is among the Tacoma, Wash.-based firm’s expanding product menu. Derived from the Russell 3000 are subsets like the Russell 1000 and 2000 that are linked to narrower segments of the equity universe like large cap and small cap stocks.
In addition to offering traditional market cap weighted benchmarks, Russell also offers indexes that use equal, dividend, fundamental and factor weightings. ETFs linked to these types of strategy indexes can be used for the core of an investment portfolio or to complement an investment allocation built around plain vanilla index funds.
In 2011, the firm introduced its own lineup of Russell-branded ETFs, giving it a unique perspective as both an index provider and investment manager. And while Russell remains a pioneer in the evolving index world, by creating indexes that expand beyond traditional beta, it’s already carved out for itself an impressive place as an ETF provider.
To learn more about what lies ahead for the ETF marketplace and Russell, we talked with David Koenig, CFA and director of investment strategy for Russell ETFs.
The low interest rate environment has more investors digging for income and the Russell Equity Income ETF (EQIN) could be the ticket. What’s the fund’s strategy?
The Russell Equity Income ETF (EQIN) is one of a family of 10 Investment Discipline ETFs built on the foundation of Russell’s more than 40 years of experience analyzing the behavior of professional investment managers. Each Investment Discipline ETF is designed to track a corresponding rules-based Russell Discipline Index that focuses on a unique set of characteristics specific to its targeted discipline.
With a total expense ratio of 0.37%, EQIN is designed to provide a new,cost-effective way to access a total return investment approach. This ETF focuses on a codified set of yield and quality characteristics typically targeted by equity income managers. It invests in companies that have historically paid dividends and exhibit traits which support the potential sustainability of the dividend, such as low earnings variability. Quarterly rebalancing helps maintain exposure to the targeted equity income characteristics, and sector and individual security limits help ensure diversification.
Russell offers ETFs that target beta and volatility. What types of investors might these products appeal to?
Russell Factor ETFs are a series of 13 U.S. and international equity ETFs focused on individual risk factors such as beta, volatility and momentum. The new indexes for these ETFs are based on familiar Russell large cap and small cap indexes and focus on the subset of index constituents that exhibit high beta, low beta, high volatility or low volatility. These ETFs provide an efficient, cost-effective new way to target distinct factor exposures, help manage risk and potentially enhance diversification.
With Russell Factor ETFs, investors have access to risk management strategies that had previously been available only to the largest, most sophisticated asset managers. Russell High and Low Volatility ETFs can be used to directly manage exposure to volatility within a portfolio and target potentially smoother equity performance over time. Russell High and Low Beta ETFs give investors the flexibility to directly manage their portfolio’s equity market sensitivity in a single trade.
A number of broad market stock ETFs weight stocks by various value metrics. How is the Russell Low P/E ETF (LWPE) different?
The Russell Low P/E ETF (LWPE) is designed to provide access to a portfolio of stocks that exhibit the characteristics typically targeted by professional investment managers who practice a low P/E investment discipline. The criteria emphasized within the underlying rules-based index include below-average valuation ratios based on multiple metrics, including earnings, cash flow, sales and book value.
In terms of weighting, Russell’s research has found that portfolios typically constructed by professional investment managers tend not to be purely market cap weighted. As such, the Russell Low P/E Index is constructed using a blend of 75% market cap and 25% equal weight to reflect the overall weighting characteristics typical of portfolios constructed by low P/E managers.
The traditional indexing camp stands behind market cap weighted benchmarks, whereas the fundamental indexing camp advocates alternative weighting methods. What does this mean for financial advisors who need to make a decision about which route to go?