Annual Report John Hancock Multifactor Etfs ETF
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Annual report John Hancock Multifactor ETFs ETF April 30, 2021 A message to shareholders Dear shareholder, The global equity markets were propelled to strong gains for the 12 months ended April 30, 2021. The U.S. Federal Reserve and other world central banks maintained their policies of ultra-low short-term interest rates. With little in the way of yield available on safer assets, investors gravitated toward equities in search of more attractive total returns. The approval and subsequent rollout of multiple COVID-19 vaccines also boosted investor sentiment by providing a clearer path for economic conditions to return to normal in 2021. The passing of fiscal stimulus packages in the United States was an additional source of support for the markets. In combination, these developments helped the major stock indexes gradually recapture, and ultimately exceed, the levels at which they stood prior to the global outbreak of the coronavirus in early 2020. Despite the overall good news, there are still obstacles. Some economies may have reopened too early, the pace of vaccinations varies widely from country to country, and many industries will take time to recover from the losses suffered. In these uncertain times, your financial professional can assist with positioning your portfolio so that it’s sufficiently diversified to help meet your long-term objectives and to withstand the inevitable bouts of market volatility along the way. On behalf of everyone at John Hancock Investment Management, I’d like to take this opportunity to welcome new shareholders and thank existing shareholders for the continued trust you’ve placed in us. Sincerely, Andrew G. Arnott President and CEO, John Hancock Investment Management Head of Wealth and Asset Management, United States and Europe This commentary reflects the CEO’s views as of this report’s period end and are subject to change at any time. Diversification does not guarantee investment returns and does not eliminate risk of loss. All investments entail risks, including the possible loss of principal. For more up-to-date information, you can visit our website at jhinvestments.com. John Hancock Multifactor ETFs Table of contents 2 Multifactor exchange-traded funds (ETFs) at a glance 3 Manager’s discussion of fund performance 9 Multifactor Consumer Discretionary ETF 10 Multifactor Consumer Staples ETF 11 Multifactor Developed International ETF 12 Multifactor Emerging Markets ETF 13 Multifactor Energy ETF 14 Multifactor Financials ETF 15 Multifactor Healthcare ETF 16 Multifactor Industrials ETF 17 Multifactor Large Cap ETF 18 Multifactor Materials ETF 19 Multifactor Media and Communications ETF 20 Multifactor Mid Cap ETF 21 Multifactor Small Cap ETF 22 Multifactor Technology ETF 23 Multifactor Utilities ETF 24 Premium/discount analysis 27 Your expenses 29 Fund’s investments 81 Financial statements 94 Financial highlights 102 Notes to financial statements 117 Report of independent registered public accounting firm 119 Tax information 120 Statement Regarding Liquidity Risk Management 121 Trustees and Officers 124 More information ANNUAL REPORT | JOHN HANCOCK MULTIFACTOR ETFS 1 Multifactor exchange-traded funds (ETFs) at a glance Many traditional indexes and index funds are weighted by market capitalization, a bias that can expose investors to certain risks and potentially reduce returns. Strategic beta strategies such as John Hancock Multifactor ETFs offer a different approach. Each ETF seeks to improve on cap-weighted strategies by tracking an index that combines active management insight with the discipline of a rules based approach. STRATEGIC BETA1: STRIKING A BALANCE BETWEEN ACTIVE AND PASSIVE INVESTING Passive Strategic beta Active Low cost Active risk Lower cost management Transparent Combines active management Potential for Excessive risk insight with the discipline of a outperformance concentrations rules-based approach in the Embedded construction of a passive index Higher cost large-cap bias Difficult to identify sustainable alpha PHILOSOPHY BACKING INDEX DESIGN According to Dimensional Fund Advisors, subadvisor for all John Hancock Multifactor ETFs, there are four key factors that drive higher expected returns, and these factors guide Dimensional’s index construction and semiannual reconstitution. Market Equity premium—stocks over bonds Company size Small-cap premium—small company stocks over large company stocks Relative price2 Value premium—value stocks over growth stocks Profitability3 Profitability premium—stocks of highly profitable companies over stocks of less profitable companies To be considered a true factor, a premium must be sensible, persistent across time periods, pervasive across markets, robust in data, and cost effective. WHY MULTIFACTOR? Individual factors can be volatile: there’s no telling which will be the best performing from year to year.Adopting a multifactor approach is one way investors can pursue more consistent—and more attractive—risk-adjusted returns. 1 Strategic beta (also known as smart beta) defines a set of investment strategies that seek to improve on traditional market-capitalization weighted indexes in order to lower risk and achieve better diversification. 2 Relative price as measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios. 3 Profitability is a measure of current profitability, based on information from individual companies’ income statements. 2 JOHN HANCOCK MULTIFACTOR ETFS | ANNUAL REPORT Discussion of fund performance Could you tell us about your investment philosophy and how it drives the composition of the ETFs you manage? We have identified four characteristics, or dimensions, of expected returns that academic research has shown to account for most of the variation in historical asset returns and that we believe will account for most of the variation in future returns. These dimensions are the overall market, company size, relative price, and profitability. The overall market dimension reflects the excess return over the risk-free rate, which is typically measured by short-term U.S. Treasury bills, that market participants demand for investing in a broadly diversified portfolio of equity securities without any style or market capitalization bias. That premium is called the equity premium. The company size dimension reflects the excess return that investors demand for investing in small-capitalization stocks relative to large-capitalization stocks. The premium associated with this dimension is the small-cap, or size, premium. The relative price dimension reflects the excess return that investors expect from investing in low relative price, or value, stocks—as measured, for instance, by their price-to-book ratios—in comparison with high relative price, or growth, stocks. The premium associated with this dimension is the value premium. Finally, the profitability dimension provides a way to discern differences in expected returns of companies with similar price-driven characteristics. Our research shows that if two companies trade at the same relative price, the one with higher profitability should have a higher expected return over time. The premium associated with this dimension is called the profitability premium. Relative to a cap-weighted measure of the market, we believe that incorporating the four dimensions of expected returns—market, company size, relative price, and profitability—into a single investment strategy offers the potential for outperformance over time, and an ETF is a vehicle well suited to our systematic and transparent investment approach. The indexes developed for John Hancock Multifactor ETFs are designed to capture these dimensions over time, and the funds are, in turn, designed to track their respective indexes. Theoretical and empirical research suggests that investors can systematically pursue higher expected returns by targeting the size, relative price, and profitability dimensions in equity markets. We integrate these dimensions to emphasize stocks with smaller market capitalizations, lower relative prices, and higher profitability. What drives changes to the composition of the funds? Changes are made to the funds as a result of regularly scheduled reconstitutions, a semiannual process by which the list of stocks and their weights in each index are updated, as well as any unscheduled changes to the index driven by company events. Reconstitution ensures that the indexes that the funds track maintain their intended exposure to the dimensions of expected returns. In addition, we impose a maximum issuer cap in each index at the time of reconstitution to control stock-specific risk. How did the broad equity market perform during the 12 months ended April 30, 2021? The U.S. market had a positive performance for the period and outperformed developed markets but underperformed emerging markets. Along the market capitalization dimension, U.S. small caps outperformed large caps, while mid caps underperformed small caps and outperformed large caps. Along the relative price dimension, U.S. large-cap value stocks underperformed large-cap growth stocks and U.S. small-cap value outperformed small-cap growth. Most developed- and emerging-market currencies appreciated relative to the U.S. dollar, and currency movements had a positive impact on the U.S. dollar-denominated returns of the respective markets. Can you tell us about a recent manager change? Effective March 1, 2021, Lukas J. Smart, CFA, left the management team and was replaced by Andres Torres. JOHN HANCOCK MULTIFACTOR