By Robert Goldsborough
Long known as a major index provider to the exchange-traded fund industry, Russell Investments has launched its first suite of exchange-traded funds, which it has dubbed its "investment discipline" ETFs because they are designed to offer exposure to large-cap U.S. stocks through six investment disciplines commonly practiced by professional investment managers.
Although Russell is very familiar to ETF investors as an index provider (with some $84 billion in ETF assets invested in products that track Russell's indexes and some $4 trillion in total assets invested in investment products of all kinds tracking its indexes), the firm manages a significant amount of money as well ($161 billion). For the past two years, Russell has labored to win SEC approval to begin offering ETFs, and it actually entered the ETF industry a few months ago when it acquired U.S. One Trust, which at that time was the provider for the actively managed fund-of-funds ETF One Fund (ONEF) (which has since been renamed Russell Equity ETF).
However, Russell has not launched its own ETFs until last week. The new funds are aimed at avoiding broad market, style, or sector index strategies in favor of tapping specific strategies that some professional investors employ.
The new ETFs track newly created Russell indexes that focus on various disciplines, all of which are based on specific fundamental screens. The aggressive growth offering, for example, tracks an index that culls companies from the Russell 1000 Index that demonstrate growth potential as measured by average-to-high consensus forecasted earnings and average-to-high one-year historical sales growth, also excluding companies with high dividend yields and low price/book ratios. Not surprisingly, the aggressive growth ETF has a heavy weighting in large technology firms.
The consistent growth offering, by contrast, also starts with the Russell 1000 Index and then picks companies with average-to-high consensus forecasted earnings, consistent earnings by average-to-low recent EPS volatility, and efficient asset utilization in the form of high returns on assets. One of the more interesting ETFs is a contrarian ETF, which takes large companies from the Russell 1000 and selects those with low price/sales multiples and excludes firms that have outperformed their market and sector peers over the past three to five years. Not surprisingly, the contrarian fund is heavy in financial services stocks.
Although all six funds own anywhere from 175 to 375 firms, the funds all have some degree of concentration at the top, with anywhere from 20% to 30% of assets invested in each of the funds' top 10 holdings. As a result, the funds all have a lot of tiny holdings.
The new funds all charge a 0.37% expense ratio, which we consider a reasonable fee for the exposure that Russell is offering. Russell also views the funds as complementary to investors' existing portfolios, giving them a new option for "intelligent beta."
The new funds are as follows:
Russell Aggressive Growth ETF (NYSEARCA:AGRG)
Russell Contrarian ETF (NYSEARCA:CNTR-OLD)
Russell Consistent Growth ETF (NYSEARCA:CONG-OLD)
Russell Equity Income ETF (NYSEARCA:EQIN)
Russell Growth at a Reasonable Price ETF (NYSEARCA:GRPC)
Russell Low P/E ETF (NYSEARCA:LWPE)
Russell has had two other funds in registration in its investment discipline family: the proposed Russell Small and Mid-Cap Defensive Value ETF and the Russell Small Cap Defensive Value ETF. The firm did not say when it plans to launch those ETFs, although it likely will be soon.
Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including Barclays Global Investors (BGI), First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.