Investors may decide to move down the cap spectrum for the diversification benefits and long-term historical premium offered by small caps.
Small cap is an inherently capacity-constrained asset class. Capacity issues may force fund managers to deviate from the investment strategy or change the investment opportunity set. Conversely, allocating more to the existing strategy may cause liquidity issues on an underlying stock level. The Harbor Small Cap Explorer ETF (QWST) strives to solve small-cap capacity issues.
QWST seeks to offer enough capacity to meet market demands by utilizing a distinct active multi-strategy approach. The fund allocates across five active small-cap managers as part of its multi-strategy approach. Furthermore, each subadvisor has its particular investment style and will act independently from the other subadvisors.
The fund’s multi-strategy approach seeks to be concentrated enough to generate meaningful alpha over time while also being diversified enough to provide significant capacity for investing in U.S. small-cap equities, according to Harbor Capital. Harbor Capital anticipates that the strategy may accept up to $4 billion in assets under management.
“Advisors that turned to ETFs often do not want to deal with a manager that might have closed the fund unexpectedly due to capacity issues. They want to strategically allocate small caps in a broader portfolio that can be used for all their clients,” Todd Rosenbluth, head of research at VettaFi, said.
How a Multi-Strategy Approach Works
The five subadvisors for QWST selected by Harbor Capital include Connacht Asset Management, Copeland Capital Management, Granahan Investment Management, Huber Capital Management, and Reinhart Partners.
Each subadvisor provides a model portfolio to Harbor Capital’s Multi-Asset Solutions Team (MAST). MAST is then responsible for allocating the fund’s assets among each subadvisor’s strategy at its discretion.
A subadvisor will generally identify securities for its model portfolio by analyzing issuers based on several factors. These factors include financial performance, industry position, growth expectations, or other investment considerations. A subadvisor will remove securities from its model portfolio for which its outlook has changed or when it has identified more attractive investment prospects, according to Harbor Capital.
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Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.
All investments involve risk including the possible loss of principal. Please refer to the Fund’s prospectus for additional risks associated with the Fund. For the Fund’s prospectus, holdings, and most current standardized performance, please click: QWST
There is no guarantee of the achievement of the investment objective of the Fund. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. The Fund’s performance may be more volatile because it may invest in issuers that are smaller companies. Because the Fund is managed pursuant to model portfolios provided by nondiscretionary Subadvisors that construct the model portfolios but have no authority to effect trades for the Fund’s portfolio, it is expected that the Advisor will effect trades on a periodic basis as the Advisor receives the model portfolios, and therefore less frequently than would typically be the case if the Fund employed discretionary subadvisors that effected trades for the Fund’s portfolio directly, which could affect the performance of the Fund.
The Subadvisors’ investment styles and security recommendations may not always be complementary, and the Subadvisors’ judgment about the attractiveness, value and growth potential of a particular security may be incorrect, which could affect the performance of the Fund. Since the Fund may hold foreign securities, it may be subject to greater risks than funds invested only in the U.S. These risks are more severe for securities of issuers in emerging market regions. There can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Board of Trustees may determine to liquidate the Fund. REITs may decline in value as a result of factors affecting the real estate sector including the risk that REITs are unable to generate cash flow to make distributions to unitholders and fail to qualify for favorable tax treatment.
Diversification in an individual portfolio does not assure a profit.
Alpha is a measure of risk (beta)-adjusted return. Beta is a measure of systematic risk, or the sensitivity of a fund to movements in the benchmark. A beta of 1 implies that the expected movement of a fund’s return would match that of the benchmark used to measure beta.
This article was prepared as Harbor Funds paid sponsorship with VettaFI.
Foreside Fund Services, LLC is the Distributor of the Harbor ETFs.
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