TILT FlexShares Morningstar US Market Factors Tilt Index Fund

With the latest forecast from the IMF, there is clearly some concern over the health of the global economy. The global organization cut its growth prediction again, with the forecast coming in at just 3.3% for global GDP growth in 2012. Clearly with more uncertainty in the U.S. market, a weak European situation, and a lack of growth in China, investors are starting to worry about the global picture.   

Still, the American market is arguably the best of the worst, as our muddle-through growth is undeniably better than the European recession, or the Chinese struggle to keep GDP increases at an extremely favorable level. Thanks to this, investors may still want to focus in on the American market at this time, albeit with a diversified approach.

To overcome a concentration risk, investors could go the way of broad U.S. equity exposure in basket form thanks to the ETFs that have impressive levels of diversification. These ETFs look to offer solid exposure to U.S. equity markets by eliminating almost all of the company specific risk. These funds hold a large number of securities in their basket but do not allocate a big chunk of assets to any one particular security (read: Create a Diversified Portfolio Using ETFs).

This strategy reduces the overall volatility of the funds as the broad approach ensures that all sectors are adequately represented. Further, this approach also minimizes the risk of an underperforming sector hampering returns.

Here, we highlight three ETFs that provide extreme diversification in the broad U.S. market (see more ETFs in the Zacks ETF Center). These funds could be ideal for those investors worried about a downturn in some companies but at the same time, are looking to slowly cycle back into the market with potentially lower risk levels:

Vanguard Russell 3000 ETF (VTHR)

The fund seeks to replicate the price and performance, before fees and expenses, of the Russell 3000 Index, which measures the return of the broad U.S. stock market. Launched in September 2010, the fund holds 2,995 securities in its basket and has total assets of $36.9 million. 

The product puts around 17% of the assets in top 10 holdings with slightly higher allocations to giants like Apple (AAPL), Exxon Mobil (XOM) and Microsoft (MSFT). The ETF invests in all-caps stocks with a mixture of value and growth securities.

This mixed bag offers extreme diversification to investors with regards to individual holdings with low volatility risk (as measured by standard deviation) of 3.84% (read: Six Easy Ways To Target Low Volatility Stocks With ETFs).  

From the sectors look, information technology (19%) takes the top spot in the basket, followed by financials (16%), consumer discretionary (12%), healthcare (12%) and industrials (11%). This suggests a nice mix between sensitive and defensive sectors.

The ETF is a low cost choice in the space, charging investors only 16 bps in fees per year (read: Guide to the 25 Cheapest ETFs). It isn’t too popular as the fund trades in small volumes of 12,000 shares per day. The fund generated impressive returns of 5.3% so far in the year and yields decent annual dividend of 1.60%.

iShares Russell 3000 Index Fund (IWV)

Launched in May 2000, this fund is one of the largest ETFs in the space with AUM of $3.4 billion. The product seeks to match the performance of the Russell 3000 Index and holds 2,989 securities in its portfolio.

Like VTHR, the fund allocates nearly 17% of the assets in top 10 companies with wide exposure to all caps including both growth and value securities. The product is also well diversified across a variety of sectors, including financial services (17%), technology (17%), consumer discretionary (14%) and health care (12%) (read: Three ETFs with Incredible Diversification).

Though IWV charges a slightly higher fee of 20 bps annually, it trades with a volume of about 275,000 shares per day suggesting a tight bid ask spread. The fund returned about 6.4% year-to-date and yields a good dividend of 1.35% per annum. IWV has volatility of 5.06%, which is more than the Vanguard product.  

FlexShares Morningstar U.S. Market Factor Tilt Index ETF (TILT)

This fund provides long-term capital appreciation and uses a multi-factor modeling approach to select the securities in its portfolio. It tracks the Morningstar U.S. Market Factor Tilt Index by holding 2,603 stocks. The product was initiated in September 2011 and has assets of $102.8 million under management.

Though the fund captures all cap stocks in the basket, it has a tilt to the small cap and value stocks (read: Small Cap Value ETF Investing 101). Value stocks tend to be undervalued by the market and do not reflect the company’s long-term fundamentals while small cap stocks look to offer opportunity to exploit market inefficiency. Hence, the combination of both small cap and value stocks could deliver the best returns.  

Along with this attractive feature, the product is well spread across individual securities and sectors. About 10% of the total assets are allotted to the top 10 holdings. Financials (19%), information technology (18%), industrials (13%), consumer discretionary (13%) and health care (12%) make a nice mix of sectors.   

With expense ratio of 0.27%, the fund is less popular trading with volume of 10,000 shares per day (read: Use Caution When Trading These Three Illiquid ETFs). Like its counterparts, the ETF generated attractive returns of about 6% so far in the year but yields a low dividend of 0.21% per annum.

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ISHARS-RS 3K (IWV): ETF Research Reports
 
FLEXS-MRN USMFT (TILT): ETF Research Reports
 
VANGD-RUS 3000 (VTHR): ETF Research Reports
 
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