There are single factor and multi-factor exchange traded funds, both of which are proliferating, meaning it can be difficult for some new entrants to this ETF genre to standout.
The ETFS Diversified-Factor U.S. Large Cap Index Fund (NYSEArca: SBUS), which debuted in late January, might just be one of the broad market, multi-factor ETF standouts and not just because the fund has outpaced the S&P 500 by about 200 basis points since coming to market. [ETF Securities Adds two new ETFs]
SBUS tracks the Scientific Beta United States Multi-Beta Multi-Strategy Equal Weight Index, which “uses a proprietary weighting strategy to provide well diversified exposure, by combining 5 models: Maximum Deconcentration, Maximum Decorrelation, Efficient Minimum Volatility, Efficient Maximum Sharpe Ratio, and Diversified Risk Weighted,” according to ETF Securities.
That might sound jargony and wonky, but in reality, SBUS is fairly straightforward and less complex than new rivals that also use the multi-factor approach. SBUS and its European equivalent, the ETFS Diversified-Factor Developed Europe Index Fund (NYSEArca: SBEU), were the first U.S.-listed ETFs to track EDHEC Scientific Beta multi-factor indexes.
One of the marquee differences between SBUS, SBEU and competing ETFs is that the ETF Securities funds’ benchmarks add an additional layer of complexity in the equal risk contribution (ERC) weighting of the individual factors. Said another way, the factors are equal-weighted, which helps reduce vulnerability when one factor lags the others.
ERI Scientific Beta is an index provider specializing in smart beta solutions and is part of the EDHEC Risk Institute, an entity that works closely with institutions to implement academic research and improve their investment and risk management process. [A Scientific Approach to Europe ETFs]