TILT FlexShares Morningstar US Market Factors Tilt Index Fund

Over the years, State Street has built itself into a major ETF power with nearly a quarter trillion dollars in AUM. The company has over 100 different offerings in its lineup, including the most popular exchange-traded fund in the world, SPY.

Still, the company hasn’t exactly been active on the product development front so far this year, as it has debuted just a handful of funds in 2012 with most coming in the first few months of the year. In fact, besides a lone bond product in June, State Street’s latest launches were a trio of active asset allocation funds in April, suggesting that the company was starting to get overdue for a new launch, and especially so in the pure equity world.

Given this, it shouldn’t be too surprising to note that the company has just expanded its ETF offering by two with brand new funds focused in on the S&P 1500 index. However, these products will zero in on this benchmark with a ‘tilt’ on different aspects of the component securities’ makeup (read The Truth about Low Volume ETFs).  

The two new funds are the SPDR S&P 1500 Momentum Tilt ETF (MMTM) and the SPDR S&P 1500 Value Tilt ETF (VLU), which obviously target, respectively, stocks with high momentum and those with value characteristics.  With this ‘tilt’, the goal is to lean towards more favorable stocks while moving away from those that have unappealing characteristics, hopefully beating out broad markets in the process.

This focus could make these funds interesting choices for those seeking broad market exposure, but with a more ‘alpha seeking’ approach. It should also be noted that this could be a much cheaper way to find potential alpha, as both of these funds charge investors 35 basis points a year in fees (see Who Says iShares ETFs Aren’t Cheap?).

For investors interested in the methodology behind these two unique products, we have highlighted some of the key details regarding MMTM and VLU below:

Value Tilt ETF

According to State Street’s ‘A Case For Tilt Investing’, VLU looks to provide diversified exposure to low relative valuation stocks in the U.S. market. It looks to do this by ‘tilting’ towards stocks with low valuations and away from those with high valuations.

This is accomplished by looking at a few key attributes such as earnings, cash flow, sales, book value, and dividends, just to name a few. From a sector look, the portfolio is skewed towards financials and telecoms, while technology and health care lose some of their weighting (see Try Value Investing with these Large Cap ETFs).

This also results in an index that has a higher dividend yield and lower key ratios such as on the PE, P/CF, and P/B fronts. However, investors should note that ROE is lower for the value index, while EPS growth rates also come in lower than what investors see on the broad S&P Composite 1500 benchmark.

Momentum Tilt ETF

MMTM takes the opposite approach, instead looking for stocks that have shown positive price appreciation characteristics over the past year. This is done via a look at price performance over the past 11 months for all the stocks in the S&P 1500 benchmark, and tilting towards those that have done the best.

Currently, this tilts the portfolio to larger cap securities that are generally more expensive than the broad index average. Interestingly, the dividend yield is also higher, suggesting that dividend payers have been doing quite well as of late (see 10 Great ETFs Yielding 7% or More).  

From a sector look, staples and tech are tilted towards, while energy and financials account for much of the shift away on the other side of the equation. Investors should also note that AAPL receives a weight of nearly 8.4% in MMTM thanks to its incredible performance in the past year, while the stock receives a paltry 2.3% in the value fund, thanks to some of its less impressive ratios, at least according to the index provider.

Tilt ETF Competition

The idea of tilting portfolios to a particular market segment is relatively new in the ETF world. However, one issuer, FlexShares, already has a small lineup of tilted products of its own, giving investors exposure to a tilted index in American, developed, or emerging markets.

Yet, FlexShares’ approach does not tilt towards value or momentum in its TILT, TLTE, or TLTD, and instead focuses in on stock size. In essence, the portfolio of stocks leans exposure towards small caps and, in particular, value securities in this segment.

This approach looks to highlight stocks that have higher potential long term growth in a way to enhance risk return characteristics of a given investment in the fund. While TLTE and TLTD are quite new, TILT has certainly proven that this technique is popular among investors as the fund has amassed about $140 million in its roughly one year on the market (read FlexShares Debuts Two international ETFs).

Given this success by TILT, it is clear that there is at least some interest in stock portfolios that tilt exposure to a particular segment that is either overlooked or can offer up potentially better returns. Thanks to this, State Street could have a few winners on its hands with the new VLU and MMTM, but obviously only time will tell if investors embrace these securities as an easy way to tap into ‘tilted’ methods in ETF form.

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APPLE INC (AAPL): Free Stock Analysis Report
 
(MMTM): ETF Research Reports
 
FLEXS-MRN USMFT (TILT): ETF Research Reports
 
FLEXS-MR DMXUSF (TLTD): ETF Research Reports
 
FLEXS-MR EMFTIF (TLTE): ETF Research Reports
 
(VLU): ETF Research Reports
 
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