Adeepdiveinto Manulife smart beta ETFs
EXCLUSIVE SERIES ON EXCHANGE-TRADED FUNDS
When Manulife Investments decided to launch a suite of exchange traded funds, it wanted to ensure the new products would offer value to investors and advisors consistent with its mutual fund line-up. It decided on smart beta ETFs, which incorporate a rules-based index approach to investing that intentionally deviates from traditional benchmarks.
But what, exactly, are the index rules that govern all Manulife ETFs? And how can these ETFs offer exposure to such a broad swath of developed markets?
Manulife tasked Dimensional Fund Advisors to bring its 37-year track record of developing investment strategies based on academic research to the new ETFs.
“The philosophy behind the Manulife indexes is all the same,” says Lukas Smart, a senior portfolio manager and vice-president with Dimensional Fund Advisors LP, and one of the portfolio managers for the Manulife ETFs. “Our indexes sort the eligible securities based on what we call the dimensions of higher expected returns. Across the board, we want to magnify the market weight of securities that demonstrate these dimensions, which include deeper value, lower total market capitalization and higher profitability.”
Dimensional developed its proprietary Index Memory* system, which balances the trade-off between seeking higher expected returns against the cost of implementation, based on the investment approach the firm has taken for more than 37 years. The indexes also employ enhanced redistribution, which considers recent information in prices and how best to use the proceeds from a corporate action.
“Enhanced redistribution puts corporate action proceeds back to work by finding securities that the index most wants to hold based on recent characteristics,” says Smart.
Manulife offers six ETF products, including the Manulife Multifactor U.S. Large Cap Index ETF, the Manulife Multifactor U.S. Mid Cap Index ETF, the Manulife Multifactor Developed International Index ETF, and the Manulife Multifactor U.S. Small Cap Index ETF — all in hedged or unhedged structures. Manulife also offers the Manulife Multifactor Canadian SMID Cap Index ETF and the Manulife Multifactor Canadian Large Cap Index ETF.
While the philosophy for the indexes that the ETFs track is the same, how that philosophy is applied can differ based on market. For example, the top 750 securities in the U.S. are defined as “large” while the top 75 securities in Canada are considered “large,” simply because there are far fewer Canadian securities available. “Size, relative price, and profitability are relative terms that can be applied in any market,” says Smart. “What’s important is that you take market structure into consideration when designing the index.”
The Manulife ETF products were designed to allow Canadian advisors the ability to create a comprehensive coverage of the securities universe in developed markets.
“The ETFs deliberately feature little overlap and allow advisors to be very intentional in the exposure they deliver within Canadian investors’ portfolios,” says Darnel Miller, director, ETF capital markets & institutional sales with Manulife Investments. “An advisor can cover a broad range of the developed securities universe, or just select one or two of the ETFs if that’s what makes sense for a client’s portfolio.”
Manulife’s Multifactor Developed International Index ETF, for example, offers diversification outside of the U.S. and Canadian markets through exposure to 20 countries representing most of the developed world.
“Advisors have expressed considerable interest in this ETF’s large exposure to Japan, which as of May 2018 represented around 25 per cent of the fund,” says Miller. “They like that the strategy provides access to foreign markets, such as Japan, which investors traditionally don’t get a lot of exposure to. And it does that through the thoughtful lens of Dimensional’s multi-factor strategy.”
As newer products, only four of the Manulife ETFs have reached the one-year mark required to report results. “Our ETFs pursue the potential for higher expected returns, and in the first year of existence we’ve been encouraged by the results,” says Miller.
*Index Memory is a trademark of Dimensional Fund Advisors LP and is registered in the US.
Commentary is for general information purposes only and shouldn’t be relied on for specific financial or other advice. Opinions expressed are subject to change based on market and other conditions.
Commissions, management fees and expenses all may be associated with exchange traded funds (ETFs). The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Investment objectives, risks, fees, expenses and other important information are contained in the ETF facts as well as the prospectus, please read before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Manulife ETFs are managed by Manulife Investments, a division of Manulife Asset Management Limited.
“Dimensional Fund Advisors” and “Dimensional” refer to the Dimensional separate but affiliated entities generally, rather than to one particular entity. Dimensional Fund Advisors Canada ULC is the sub-advisor to the Manulife ETFs. Dimensional Fund Advisors LP is an investment adviser registered with the US Securities and Exchange Commission and is an affiliate of and sub-advisor to Dimensional Fund Advisors Canada ULC. Neither Dimensional Fund Advisors Canada ULC nor any of its affiliates is affiliated with Manulife Investments or its affiliates.
Neither John Hancock Advisers, LLC nor Dimensional Fund Advisors LP guarantee the accuracy and/or the completeness of the underlying index or any data included therein, and neither John Hancock Advisers, LLC nor Dimensional Fund Advisors LP shall have any liability for any errors, omissions or interruptions therein. Neither John Hancock Advisers, LLC nor Dimensional Fund Advisors LP make any warranty, express or implied, as to results to be obtained by the Manulife ETFs, owners of the shares of the Manulife ETFs or any other person or entity from the use of the underlying index, trading based on the underlying index, or any data included therein, either in connection with the Manulife ETFs or for any other use. Neither John Hancock Advisers, LLC nor Dimensional Fund Advisors LP make any express or implied warranties, and expressly disclaim all warranties of merchantability or fitness for a particular purpose or use with respect to the underlying index or any data included therein. Without limiting any of the foregoing, in no event shall either John Hancock Advisers, LLC or Dimensional Fund Advisors LP have any liability for any special, punitive, direct, indirect or consequential damages (including lost profits) arising out of matters relating to the use of the underlying index, even if notified of the possibility of such damages.
This article was created by Content Works, Postmedia’s commercial content division, on behalf of Manulife Investments.
THIS ARTICLE WAS CREATED BY CONTENT WORKS, POSTMEDIA’S COMMERCIAL CONTENT DIVISION, ON BEHALF OF MANULIFE INVESTMENTS.