The quality of a company’s earnings are thought to be a better gauge of future earnings performance as high quality firms exhibit strong accounting fundamentals. FTSE Russell targets companies based on return on assets, change in asset turnover, accruals and leverage.
Lastly, the volatility factor identifies stocks with relatively low volatility by measuring the standard deviation of five years of weekly on each stock, so the index leans towards securities with the smallest swings. Many studies have shown that portfolios with less volatility or low beta offer a combination of higher-than-average return and smaller drawdowns.
As a way to maximize returns while mitigating risks, the smart-beta ETFs’ underlying indices combine the five factors to potentially generate improved risk-adjusted returns.
“We believe in the long-term potential for all of the factors, we have outlined to improve risk-adjusted returns, it simply makes sense that investors might want to strengthen their exposure to all of them,” according to DeAWM.
For more information on smart beta strategies, visit our smart beta category.
Max Chen contributed to this article.