The volatility in financial markets has presented investors with pockets of opportunity. One way to maximise this is by utilising smart beta strategies, specifically smart beta exchange-traded funds (ETFs).

Unlike their traditional counterparts, smart beta ETFs employ an alternative weighted index strategy by using a rules-based system to choose assets for its portfolios, according to Affin Hwang Asset Management Bhd (AHAM) managing director Teng Chee Wai. This strategy was created to add value by selecting, weighting and rebalancing the stocks on an index based on specific, objective factors.

“Investors should really look into smart beta strategies such as momentum or dividend factors to exploit investing anomalies. These strategies are known to have beaten the market over the long term as it also seeks to mitigate the challenges of traditional market cap-weighted ETFs,” says Teng.

“The goal of a smart beta ETF is to beat the market or match it while taking less risk in a much simpler manner by tracking a customised smart beta index, which results in simplicity, transparency and low cost.”

A momentum strategy refers to investments made based on certain trends in key areas such as earnings or share price movements, believing that certain stocks with a strong uptrend will continue rising while counters that are faltering will continue to underperform. A dividend strategy refers to investments that seek high yields from dividend-paying assets.

On July 9, AHAM launched two smart beta ETFs — the TradePlus DWA Malaysia Momentum Tracker and TradePlus MSCI Asia ex Japan REITs Tracker. The former is the first momentum-based ETF in the country while the latter is the first real estate investment trust (REIT) ETF to be listed in Malaysia. These ETFs can be traded by any investor with a Central Depository System (CDS) account.

Teng says the TradePlus DWA Malaysia Momentum Tracker offers a strategy focused on the performance of the domestic market through companies that local investors would already be familiar with. 

The constituents of the index will comprise companies that have seen the largest momentum movements to capitalise on market swings. Its benchmark is the Dorsey Wright Technical Leaders Malaysia Index, which selects securities based on individual stock momentum. Teng says AHAM chose to work with the Nasdaq to capitalise on its Dorsey Wright Methodology.

“We believe the methodology holds the advantage of being able to deliver comparatively better results over the longer term by capturing the upswing momentum. However, investors would need to note that the ETF is also subject to higher volatility, given its more concentrated portfolio and the strategy that it utilises,” he adds. 

Nasdaq Dorsey Wright is the index provider of more than 30 ETFs and mutual funds available through top fund providers such as First Trust, Invesco and State Street. The total assets under management tracking the indices provided by Nasdaq Dorsey Wright is about US$7 billion (RM30 billion).

The Dorsey Wright methodology focuses on the price of a security as it is the ultimate determinant of supply and demand in the marketplace, explains Nasdaq Dorsey Wright head of research and client engagement Jay Gragnani. Analysing the price action of a security can yield important information as to what is winning the battle for that security, he says. 

“Dorsey Wright analyses a company’s stock using the time-tested ‘point and figure’ methodology and relative strength analysis, such as analysing the performance of investment options against one another, both derived from the relationship of supply and demand. The ‘point and figure’ methodology is a logical, organised way of uncovering the imbalances between supply and demand in the marketplace,” says Gragnani.

Applying the methodology to the securities listed on Bursa Malaysia, it comes up with a momentum score for each security based on the Dorsey Wright relative strength point and figure methodology. The 20 securities with the highest momentum scores are equally weighted on the index.

Gragnani says the ideal environment favourable for relative strength analysis is a market with stable leaders and a large dispersion in returns between the leaders and laggards. If the market sees frequent changes in leaders and is choppy and trendless, the methodology may not be able to deliver. 

“By applying our methodology to the Malaysian market, we see that it has the potential to add value, and that is reflected by the backtesting results. We are proud to work with AHAM to introduce this smart beta methodology to investors in Malaysia,” says Gragnani.

Although the broader domestic market has been somewhat lacklustre, with mounting pressure from both internal and external forces, Teng says it cannot be denied that pockets of opportunity can still be found. The smart beta strategy can take advantage of this as the features that are put in place capture stocks with the highest price momentum. This strategy has done well historically and even better during recovery periods.

“Investors of the fund can expect to ride the recovery of the Malaysian market. As the index includes names with the highest price momentum, we believe this ETF will be able to truly reflect the recovery of the domestic economy. However, investors would need to understand that the price fluctuations of the fund may be comparatively higher, given the strategy that it utilises,” says Teng. 

The ETF comprises 20 stocks that are rebalanced on a quarterly basis. As at June 30, its constituents included Supermax Corp Bhd, Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd. 

Meanwhile, the TradePlus MSCI Asia ex Japan REITs Tracker provides the market with a dividend ETF strategy as the fund house understands the importance of dividends to investors, he says. It also wanted to differentiate the ETF from other currently available solutions. This ETF tracks the MSCI AC Asia ex Japan IMI Index, focusing on consistent dividend-yielding REITs.

“We have seen a global selldown across all asset classes due to the Covid-19 pandemic and the REIT sector was not spared. This may be a blessing in disguise for us, having not launched the ETF earlier,” says Teng.

“This product remains focused on seeking out high and consistent dividend-yielding REITs through the smart beta selection process of the index. The strategy has historically provided an average annual dividend yield of 4% to 5% per annum.”

Teng believes that against the current backdrop, quality names will remain in favour as the economy gradually reboots. The TradePlus MSCI Asia ex Japan REITs Tracker provides investors with a diverse range of 30 REITs listed across the region, covering commercial, logistic, office and residential properties. The constituents include Ascendas REIT, CapitaLand Mall Trust, Link REIT and Mapletree North Asia Commercial Trust. 

“We believe this product bodes well for investors, mainly for its dividend strategy. It also provides investors with convenient access and exposure to the Asia ex-Japan REITs market,” says Teng. 

“We have seen a spark of recovery in the sector and are optimistic that REITs will see a higher pick-up once the dust settles and regional economies get back on track. But given the sell-off that has taken place, now would likely be an opportune time to gradually build exposure.” 

Teng says the fund house would like to launch more ETFs either later this year or early next year. He believes that while there has been a growing number of issuances in Malaysia, the selection available to investors here pales in comparison with what is available in the more developed ETF markets. 

“Thus, we are focused on providing investors with a complete product suite to equip themselves with the tools necessary to build quality portfolios. We do not only want to provide core holding solutions but also satellite solutions to take advantage of the prevailing market conditions. AHAM will constantly strive to build the ETF market in Malaysia as we believe that passive investments can complement active strategies in different markets,” says Teng.