TILT FlexShares Morningstar US Market Factors Tilt Index Fund

Northern Trust continues to expand its ETF lineup under its ‘FlexShares’ brand and for good reason given how popular its four most recent ETFs have been. These products have already given Northern Trust over $1.5 billion in AUM, suggesting that the firm has already seen great success despite possessing funds that are just a little over one year old.

Thanks to this trend, FlexShares announced the debut of two more funds, utilizing the ‘tilt’ model that is currently the basis for the firm’s Morningstar US Market Factor Tilt Index Fund (TILT). This product has over $125 million in AUM, although it trades on light volume, so it is easy to see why Northern Trust would want to further expand on this methodology with other ETFs (read Active Large Cap ETFs: The Best of Both Worlds?).

In doing this, the company is expanding beyond the U.S. market and into both developing and emerging nations with the ‘tilt’ strategy. This technique looks to push the portfolio away from large caps and put a greater focus on small cap securities.

Tilt Strategy in Focus

These pint sized securities are often overlooked—if not entirely forgotten—when compared to their large cap counterparts despite their potentially superior growth metrics. This suggests that many investors are too heavily concentrated in low growth large cap stocks, usually to their own detriment if they are looking for long term asset appreciation.

Yet, the tilt focus still recognizes the value of large caps in a portfolio and the safety that these bring to investors. It forgoes the strategy of equal weight ETFs and pure small cap products in order to just ‘tilt’ towards small caps instead of giving the space a massive overweighting.

By doing this, investors could potentially obtain a better risk reward profile for their holdings in a way that still isn’t too concentrated in small caps. Instead, it is just a tilt towards small caps, hence the name (read the Comprehensive Guide to Total Market ETFs).

For investors who find this strategy intriguing, the recent announcement of FlexShares which looks to expand this lineup could be interesting. The firm is now going beyond the U.S. market with the tilt approach, with the Morningstar Developed Markets ex-US Factor Tilt Index Fund (TLTD), and the Morningstar Emerging Markets Factor Tilt Index Fund (TLTE).

Below, we highlight some of the key points from these recently launched ETFs for those investors who are looking for a new way to play international markets that has just a little bit more exposure to small cap securities:

TLTD- This new ETF looks to track the Morningstar Developed Markets ex-US Factor Tilt Index which is a benchmark focusing on international firms from developed markets with added exposure to small cap stocks. For this approach, the firm looks to charge investors a relatively solid 0.42% in fees after waivers (read Ten Biggest U.S. Equity Market ETFs).

In terms of holdings, the fund is expected to be skewed towards financials (23%), while materials, industrials and consumer discretionary stocks are all expected to make up at least 11% of assets as well. For nations, Japan and the UK both make up about 20% each, while Western Europe and the rest of the Anglosphere accounts for much of the rest of the fund.

TLTE- If you are looking for the tilt approach in emerging market form, look no further than TLTE. This product, which costs 65 basis points a year after waivers, follows the Morningstar Emerging Markets Factor Tilt Index giving exposure to developing economies around the world with a small cap tilt.

In terms of holdings, financials again take the top spot at just under 23% of assets, while they are followed by 13% weights to technology and materials. For national exposure, China takes the top spot, while a number of Asian markets rounding out the top three, thanks to Korea and Taiwan, while Brazil and South Africa also receive decent allocations as well (see Three Biggest Mistakes of ETF Investing).

ETF Competition

While there obviously are not any direct competitors to these new products in the international markets, there are a host of other funds targeting both developed nations as well as emerging countries currently available in the ETF world. Given this, investors will probably look to TILT in order to give some idea of how the tilt strategy can perform when stacked up against broad markets.

Over the trailing one year period, TILT has been pretty consistently neck and neck with SPY and RSP in terms of overall returns, although SPY has definitely beaten it out over the past 52 weeks. A similar trend appears when taking a year-to-date look, with TILT finishing in the middle of SPY and RSP (SPY performing the best).

However, it should be noted that SPY often outperforms in rough markets compared to the other two, due to its focus on large cap safety, while RSP performs the worst thanks to its more volatile nature. Thanks to this, investors should probably consider TILT, and the two new funds, TLTE and TLTD, as a ‘middle road’ between equal weight and pure market cap funds (see Is It Time for an Equal Weight ETF?).

In other words, these tilt products seem unlikely to outperform both styles in any given period, and will probably have highly correlated performance that is less volatile than equal weighting and more volatile than pure market cap weighted products. So these new tilt products should instead be looked at as a potentially better mix of growth and safety, for those seeking a different path than what is currently on the market for international ETFs.  

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Author is long RSP.

 
GUGG-SP5 EQ ETF (RSP): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
FLEXS-MRN USMFT (TILT): ETF Research Reports
 
(TLTD): ETF Research Reports
 
(TLTE): ETF Research Reports
 
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