New Multifactor ETFs from Manulife

As more and more ETF providers jump on the smart-beta bandwagon, Manulife had an even better idea – why not team up with the pioneers of factor-based investing, Dimensional Fund Advisors (DFA)?

And they did just that. For years, investors could only gain entry to the exclusive Dimensional party if they hooked up with a DFA-approved advisor. Now, do-it-yourself investors have easy access to at least a portion of DFA’s secret sauce through Manulife’s Multifactor ETFs:

Regression Analysis: 2007 to 2016

Manulife ETFs	Ticker	Management Fee
Multifactor Canadian Large Cap Index ETF	MCLC	0.40%
Multifactor U.S. Large Cap Index ETF – Hedged Units	MULC	0.40%
Multifactor U.S. Large Cap Index ETF – Unhedged Units	MULC.B	0.35%
Multifactor U.S. Mid Cap Index ETF – Hedged Units	MUMC	0.50%
Multifactor U.S. Mid Cap Index ETF – Unhedged Units	MUMC.B	0.45%
Multifactor Developed International Index ETF – Hedged Units	MINT	0.55%
Multifactor Developed International Index ETF – Unhedged Units	MINT.B	0.50%

Source: Manulife Investments

The DFA factor

Staying true to DFA’s approach, Manulife’s ETFs target factors that have historically generated higher returns (such as smaller cap, lower relative price and higher profitability). As DFA is arguably best known for the small cap tilts in their funds, it’s interesting to note that Manulife’s ETFs generally exclude smaller companies (this is likely due to the difficulty trading smaller companies within an ETF structure).

Put your John Hancock here

Manulife’s ETFs follow the John Hancock Dimensional Indices, which are fairly new and have very little historical performance data. I did manage to scrape together over ten years of monthly returns for the US large cap index, so we can use this data to run a regression analysis for comparison purposes (basically, we are trying to determine whether the Manulife ETFs are expected to be comparable to DFA funds in terms of small cap, relative price and profitability factor tilts).

In the chart below, I’ve included the historical factor tilts for the Dimensional US Vector Equity Index (which is similar to the DFA US Vector Equity Fund), the Dimensional US Core Equity Index (which is similar to the DFA US Core Equity Fund) and the John Hancock Dimensional Large Cap Index (which is similar to the Manulife Multifactor U.S. Large Cap Index ETF). A higher value indicates a greater exposure to each of the academic factors.

Regression Analysis: 2007 to 2016

Index	Size	Relative Price	Profitability
Dimensional US Vector Equity Index	0.39	0.40	0.11
Dimensional US Core Equity Index	0.18	0.21	0.13
John Hancock Dimensional Large Cap Index (CAD)	0.01	0.03	0.11

Sources: AQR, Morningstar Direct, Dimensional Fund Advisors Canada ULC

The Dimensional US Vector and Core Equity Indices have a significant exposure to the size, relative price and profitability factors, while the John Hancock Dimensional Large Cap Index has significant exposure to only the profitability factor. This would indicate that a DIY investor using the Manulife Multifactor ETFs is not expected to have a similar investment experience to someone using the DFA mutual funds.

As I generally recommend broad-market ETFs to DIY investors, I’ve also included a regression analysis in the chart below that compares the S&P Total Market Index (similar to the iShares Core S&P U.S. Total Market Index ETF), the CRSP US Total Market Index (similar to the Vanguard U.S. Total Market Index ETF) and the John Hancock Dimensional Large Cap Index (which is similar to the Manulife Multifactor U.S. Large Cap Index ETF).

Regression Analysis: 2007 to 2016

Index	Size	Relative Price	Profitability
S&P Total Market Index	0.00	0.03	0.08
CRSP US Total Market Index	0.01	0.02	0.08
John Hancock Dimensional Large Cap Index (CAD)	0.01	0.03	0.11

Sources: AQR, Morningstar Direct, Dimensional Fund Advisors Canada ULC

Beta in disguise

The results would indicate that the John Hancock Dimensional Large Cap Index has very similar factor tilts to plain-vanilla broad-market indices. In other words, you’re paying a steep premium to Manulife for market returns that are available for much cheaper.

Although these new Manulife ETFs have a great deal of hype behind them (thanks in part to DFA’s reputation), they don’t appear to offer anything close to the factor tilts available in DFA mutual funds. For DIY investors, sticking to the boring Couch Potato investment philosophy is likely your best bet.