Factor-based investing has become increasingly accessible thanks to exchange traded funds, but there are drawbacks to single factor funds.
For example, there are periods when some factors a bound to lag others. In strong trending bull markets, investors may prefer momentum over low volatility. In a risk off environment, investors might eschew momentum for quality and the examples go on from there.
However, there are plenty of multi-factor ETFs to consider, including the newly minted Arrow QVM Equity Factor ETF (NYSEArca: QVM).
QVM, which debuted in March, is an equal-weight fund comprised of 50 stocks that “simultaneously demonstrate strong quality, value and momentum characteristics. The use of a quality metric lends the portfolio a defensive characteristic by reducing overall volatility of returns and helping to mitigate losses during market declines. Meanwhile, the portfolio’s valuation and momentum metrics are designed to capture upward price movement,” according to Maryland-based Arrow.
QVM’s approach is compelling, particularly for investors looking for companies that like to reward their shareholders. In an interview with Trang Ho of Forbes, Arrow Investment Advisors CEO Joseph Barrato QVM’s underlying “index takes into account earnings and dividend consistency, and a company’s willingness to buyback its own shares. For the value screen, the index looks at a type of earnings-to-price ratio—earnings per share divided by the stock price.”
QVM tracks the Arrow Insights Quality Value Momentum Index (AIQVM), which sports “a favorable risk/return profile relative to both the capitalization-weighted S&P 500 Index and the equal-weighted S&P 500 Index during the past 20 years,” according to ArrowShares. [ArrowShares Boosts ETF Lineup]
In addition to sporting a favorable risk/reward profile to the S&P 500 over the past two decades, the Arrow Insights Quality Value Momentum Index also compares favorably with single-factor strategies such as momentum and value. [A New Factor ETF]
Importantly, QVM has the potential to prove durable in various market settings.
“There are periods when the AIQVM Index would expect to trail the broad market when market prices are driven by speculation, like the Internet craze of the 1990s. However, when the internet bubble burst in the early 2000s, due to a lack of quality and earnings, the Tri-Factor™ approach really shined,” Barrato told Forbes.
As of the end of January, QVM’s largest sector weight was 20% to consumer staples, followed by 18% to technology and 16% to industrials. Two-thirds of the ETF’s weight is allocated to large-caps with 18% to mid-caps and 16% to smaller stocks.
Top 10 holdings include (NYSE: KSS), Aetna (NYSE: AET) and Dow component UnitedHealth (NYSE: UNH). The new Kohl’s ETF charges 0.65% per year.
Arrow QVM Equity Factor ETF