Schwap Launch 6 New Smart Beta ETFs

Charles Swab has launched six new Smart Beta ETFs based of a revised Smart Beta Index methodology from Research.

These Smart Beta Indices like RAFI only seek to change constituents through a Fundamental Weighting scheme and not through any filtered Selection.

As a further refinement the annual reconstitution of the Russell Fundamental Index is implemented across the year rather that at one point in time to help increase investment capacity and minimize entry point risk. To do this, the index is divided into four equal tranches. Each of the tranches is managed like a separate portfolio and each is rebalanced at different times in the year

The Fundamental Factors

Adjusted Sales: Constituent level adjusted sales are calculated using the average sales generated by each constituent over the past five years. Average total sales are then adjusted to take into consideration financial leverage by multiplying the sales component by an adjustment factor. The constituent level adjustment factor is equivalent to the ratio of average equity to average assets. Adjusting for financial leverage decreases the weight of companies with significant leverage.

Retained Operating Cash Flow: Constituent level retained operating cash flow is calculated using the average operating cash flow from operations less dividends and buybacks (as defined below) over the past five years.

Dividends plus Buybacks: Constituent level dividends plus buybacks is calculated using the average dividends paid and share buybacks over the past five years. 

The average of the three Fundamental factor weights determines the aggregate Russell Fundamental Factor Weight for each individual company.

The funds are:

The Schwab Fundamental U.S. Broad Market Index ETF offers diversified exposure across large- and small company U.S. stocks using the fundamental index methodology, developed by Rob Arnott and his firm, Research Affiliates, LLC. The Russell Fundamental Index Series® utilizes three fundamental measures of company size: retained operating cash flow, adjusted sales, and dividends plus buybacks. It seeks investment results that track performance, before fees and expenses, of the Russell Fundamental U.S. Index.

 

The Schwab Fundamental U.S. Large Company Index ETF provides exposure to large U.S. companies using fundamental index methodology, developed by Rob Arnott and his firm, Research Affiliates, LLC. The Russell Fundamental Index Series® utilizes three fundamental measures of company size: retained operating cash flow, adjusted sales, and dividends plus buybacks. It seeks investment results that track the performance, before fees and expense, of the Russell Fundamental U.S. Large Company Index.

 

The Schwab Fundamental U.S. Small Company Index ETF provides exposure to small U.S. companies using the fundamental index methodology, developed by Rob Arnott and his firm, Research Affiliates, LLC. The Russell Fundamental Index Series® utilizes three fundamental measures of company size: retained operating cash flow, adjusted sales, and dividends plus buybacks. It seeks investment results that track the performance, before fees and expense, of the Russell Fundamental U.S. Small Company Index.

 

The Schwab Fundamental International Large Company Index ETF provides exposure to international large companies using the fundamental index methodology, developed by Rob Arnott and his firm, Research Affiliates, LLC. The Russell Fundamental Index Series® utilizes three fundamental measures of company size: retained operating cash flow, adjusted sales, and dividends plus buybacks. It seeks investment results that track the performance, before fees and expense, of the Russell Fundamental Developed ex-U.S. Large Company Index.

 

The Schwab Fundamental International Small Company Index ETF provides exposure to international small companies using the fundamental index methodology, developed by Rob Arnott and his firm, Research Affiliates, LLC. The Russell Fundamental Index Series® utilizes three fundamental measures of company size: retained operating cash flow, adjusted sales, and dividends plus buybacks. It seeks investment results that track the performance, before fees and expense, of the Russell Fundamental Developed ex-U.S. Small Company Index.

 

The Schwab Fundamental Emerging Markets Large Company Index ETF provides exposure to emerging markets large companies using the fundamental index methodology, developed by Rob Arnott and his firm, Research Affiliates, LLC. The Russell Fundamental Index Series® utilizes three fundamental measures of company size: retained operating cash flow, adjusted sales, and dividends plus buybacks. It seeks investment results that track the performance, before fees and expense, of the Russell Fundamental Emerging Markets Large Company Index.

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Russell Fundamental Indices Innovative rebalancing Methodology

Johnni Nielsen's picture

Russell Indexes, in collaboration with Research Affiliates LLC, has developed an innovative approach that reconstitutes index membership annually but spreads out the implementation of the reconstituted weights quarterly. This approach mitigates the need to rebalance the index frequently, by effectively rebalancing a portion of the index each quarter. The method has historically resulted in lower turnover and better representation of the fundamental index strategy. The approach also increases investment capacity, and it minimizes entry point risk for the investor as well.

Paper: Innovative rebalancing provides better representation withoutimpacting turnover

 

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