With the market-capitalization beta-indexing exchange traded fund space mostly filled out, money managers are expanding into factors-based or fundamental indexing methodologies to provide active strategies in a passive fund structure.
“Exchange-traded-fund companies are following in the footsteps of financial advisor favorite Dimensional Fund Advisors Ltd. and building new products around academic research to offer investors a new way to beat the market,” reports Jason Kephart for Investment News.
“Factor investors probably started off as Bogle-style buy-and-hold investors, then looked deeper into the research,” Samuel Lee, an analyst at Morningstar, said in the story.
Research has shown that overweighting companies with factors like favorable prices, profitability, size or momentum can generate better overall risk-adjusted returns in an investment portfolio. [ETF Index Changes Show Methodology Matters]
“Passive and factor investing are joined at the hip,” Lee added. “Passive is based on a lot of academic and finance theory that says it’s impossible to beat the market. Factor investing is an offshoot of that.”
BlackRock’s iShares, Charles Schwab Investment Management and Northern Trust’s FlexShares have recently added their own ETFs based on investment factors like value, profitability, size and momentum, according to the article. [Schwab to Launch Its First Fundamentally Weighted ETFs]