Marketsmuse updates that fund giant John Hancock Investments will partner with Dimensional Fund Advisors on six “smart-beta” exchange-traded funds, according to paperwork filed with regulators early on Monday.
Dimensional, based in Austin, Texas, is one of the earliest proponents of factor investing. They blend elements of index-based investing and active investing in order to predictably exploit market returns and minimize trading costs. Many of today’s smart beta products — from index providers including FTSE Russell, WisdomTree, Research Affiliates — are based on a similar premise.
John Hancock unveiled in its preliminary prospectuses for the factor-based ETFs that DFA, the market-beating investment firm that adheres to the academic work of Eugene Fama and Kenneth French, will be the sub-advisor for its ETFs. John Hancock has worked with DFA on mutual funds and asset-allocation strategies since 2006.
John Hancock initially filed plans for ETFs nearly four years ago, but has yet to bring an ETF to market. However, a new filing with the Securities and Exchange Commission indicates the firm is getting closer to launching its first ETFs.
The new filing provides details and expense ratios on the proposed ETFs. For example, the John Hancock Multifactor ETF, which is expected to charge 0.35% per year, will track an index comprised a subset of securities in the U.S. Universe issued by companies whose market capitalizations are larger than that of the 801st largest U.S. company at the time of reconstitution. In selecting and weighting securities in the Index, the Index Service Provider uses a rules-based process that incorporates sources of expected returns. This rules-based approach to index investing may sometimes be referred to as multifactor investing, factor-based investing, strategic beta, or smart beta.
John Hancock manages nearly $130 billion in mutual funds and money-market funds. Dimensional manages $406 billion. Dimensional already advises on John Hancock-branded mutual funds that have $3.2 billion in assets.
We all know that equity markets have been climbing the wall of worry for the past number of months. With both the Dow and S&P recovering to the sanguine levels not seen since the spring of 2008, covered call (buy-write) strategies within the mutual fund complex has until recently remained a relatively untapped strategy, despite the time-tested success of many fund managers who have systematically used this style of hedged investing throughout both bull and bear market cycles.
But, “the tide seems to be turning,” according to recent coverage by Peter Chapman over at Traders Magazine, who spotlights a trend change in the course of his profiling the launch of two new covered-writing closed-end funds courtesy of Mario Gabelli’s GAMCO (” GAMCO Natural Resources, Gold & Income Trust”) and John Hancock’s “Hedged Equity & Income Fund.” These are only two of the funds that are embracing a “CYA” strategy in the face of most market pundit predictions that the current upward trend is your friend, and should be expected to remain positive throughout the balance of 2012.
Whether the renewed interest in using the simplest of “hedging” strategies is attributable to percolating geopolitical concerns, or a need to enhance yield as interests rates continue to race to zero, or the growing consensus among market skeptics that what looks and sounds too good to be true often is (despite historical trends where markets typically rise into presidential elections), traders who have been around for more than 15 minutes see the resurgence of institutional option-related strategies as an approach that simply makes sense.
Observed option market pro David Beth, the Pres/COO of institutional options and ETF broker WallachBeth Capital, ” Its good [for investors] to have more options, no pun intended. The fund industry’s limited use of the most conservative option-related strategies has always been a “head-scratcher” for those who have lived through multiple market cycles over the years and always perceived that big funds are obliged to use conservative strategies. Regardless of where one thinks the market is headed in the short or medium term, these new funds illustrate the growing recognition that systematic covered call writing can cushion downside exposure and enhance portfolio returns in both low-interest rate and stagnant market cycles; especially for funds with conservative mandates.” Continue reading →