With the brightest minds on Wall Street advising people to pick their spots, exchange traded fund investors can also gain targeted exposure to the markets through smart-beta or factor-based strategies.
On the upcoming webcast, Why Factor Investing is Important in Today’s Market, Robert Bush, ETF Strategist at Deutsche Asset Management, Brad Zucker, Senior Product Manager at FTSE Russell, Lance Allen, ETF Regional Vice President of Deutsche Asset Management, and Linda Zhang, Senior Portfolio Manager and Head of Research at Windhaven Investment Management, will help outline the strategy behind factor-based investments and what the various themes can do for investors.
For example, the relatively new Deutsche X-trackers Russell 1000 Enhanced Beta ETF (NYSEArca: DEUS) and Deutsche X-trackers FTSE Developed ex US Enhanced Beta ETF (NYSEArca: DEEF) both track enhanced beta FTSE Russell indices that target quality, momentum, value, size and volatility – five key factors many financial institutions have looked at to help gain an edge over traditional beta indexing methodologies.
When considering value investments, investors may consider some intrinsic measure of a company, like earnings, book value of equity, or sales, and the price that the market puts on the measures. The lower the price, the better the perceived value makes the investment comparatively cheap to others.
The size factor considers market-cap as an indicator of performance, with small-cap stocks historically outperforming large-caps. Smaller companies are in some respects are seen as being marginalized – small-caps are less liquid, have less coverage and are not part of well known indices. These same characteristics, though, may make small-caps popular plays to capture growth ahead.
The momentum gauge targets recent price movements over time as an indicator of future performance. Momentum traders believe that high-flying stocks will fly even higher. Behavioral economists may explain that the best performers are the ones that typically garner the most attention, which would help drive additional investment demand for the popular plays.
The quality of a company’s earnings is thought to be a good gauge of future earnings performance as high quality firms exhibit strong fundamentals.
Lastly, the volatility factor selects companies with relatively low volatility, 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 above-average return and smaller drawdowns.
As a way to maximize returns while diminishing risks, the smart-beta ETFs’ underlying indices combine the five factors to potentially generate improved risk-adjusted returns for investors.
Financial advisors who are interested in learning more about smart-beta or factor-based ETF strategies can register for the Tuesday, February 23 webcast here.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.