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Looking Under the Hoods of ETFs

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Buying cars can teach you a lot about buying ETFs. With both purchases, total cost of ownership goes beyond the sticker price. By looking under the hood, you can make more informed decisions to help your clients select the investments that best meet their needs.

On the upcoming webcast, Looking Under the Hoods of ETFs, Edward Rosenberg, Head of Exchange Traded Funds at American Century Investments, Sandra Testani, Director of Product Management – Alternatives and ETFs – for American Century Investments, will lift the hood on ETFs and break down the various costs of ownership.

With the industry maturing, investors may find that ETFs come in all shapes and sizes. For example, at American Century Investments, ETF investors can find traditional mutual fund strategies from American Century that have been adapted into the ETF wrapper.

American Century was among the latest group of money managers that turned into ETF providers. American Century Investments branched away from its six-decade history of managing traditional open-end mutual funds after launching the American Century STOXX U.S. Quality Value ETF (NYSEArca: VALQ) and American Century Diversified Corporate Bond ETF (NYSEArca: KORP).

While not actively managed, the STOXX U.S. Quality Value ETF incorporates a smart beta strategy reminiscent of actively managed investments and tries to reflect the performance of the iSTOXX American Century USA Quality Value Index, which is made up of 900 largest publicly traded U.S. equity securities screened and weighted by fundamental measures of quality, value and income.

The quality factor screens out the bottom companies based on profitability, earnings quality, management quality and earnings estimate revisions. The valuation score is calculated by the attractiveness of each stock relative to peers in the same industry group based on value, earnings yield and cash flow yield metrics. Lastly, income sustainability is based on dividend growth and dividend coverage applied to eliminate the bottom of the universe of dividend-paying stocks, along with an income score based on dividend-yield computed for the remaining stocks.

The Diversified Corporate Bond ETF, though, is actively managed. The fund invests in U.S. dollar-denominated corporate debt securities issued by U.S. and foreign entities, but may also hold securities issued by supranational entities. Additionally, up to 35% of the fund’s net assets may be invested in high-yield securities or junk bonds. The fund may also invest in derivative instruments such as futures contracts and swap agreements. The weighted average duration of the fund’s portfolio is expected to be between three and seven years.

American Century also further expanded its suite of its ETFs with the American Century Quality Diversified International ETF (NYSEArca: QINT), American Century STOXX U.S. Quality Growth ETF (NYSEArca: QGRO) and American Century Diversified Municipal Bond ETF (NYSEArca: TAXF).

QINT and QGRO utilize American Century Investments’ Intelligent Beta1 methodology, which systematizes many of the same attributes that fundamental research and security selection seek to identify, in a rules-based, indexed approach. QINT is a foreign large blend fund that seeks to enhance core international exposure. Its rules-based approach analyzes each stock’s quality, growth and value characteristics to select individual securities. It also dynamically adjusts exposures in an effort to take advantage of prevailing market conditions.

The third fund, TAXF, is an actively managed municipal bond fund that combines investments in thoroughly researched high yield and investment grade municipal bonds. Designed for investors seeking current income, the fund dynamically adjusts investment grade and high yield exposures based on prevailing market conditions.

Financial advisors who are interested in learning more about incorporating ETFs in a diversified investment portfolio can register for the Thursday, June 6 webcast here.

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