For buy-and-hold investors, multi-factor investments help combine uncorrelated investment styles to smooth out volatility. Since there are multiple uncorrelated factors at play, it helps guarantee that at least one factor will help support the portfolio during times of distress. Moreover, a multi-factor ETF removes the need for investors to babysit a portfolio and switch between factors in an attempt to time market moves.
“Instead, it enables them to rest assured that, whatever specific economic conditions generally prevail the approach will have factors that may shine, they will have a player on the pitch that can provide cover,” Bush added.
As the ETF industry grows, investors are able to find a diverse set of multi-factor ETF strategies to choose from. For instance, State Street Global Advisors offers a suite of MSCI StrategicFactorsSM ETFs, including broad options like the SPDR MSCI USA StrategicFactorsSM ETF (NYSEArca: QUS), SPDR MSCI EAFE StrategicFactorsSM ETF (NYSEArca: QEFA), SPDR MSCI Emerging Markets StrategicFactorsSM ETF (NYSEArca: QEMM) and SPDR MSCI World StrategicFactorsSM ETF (NYSEArca: QWLD).
The SPDR strategic factor suite select components based on a combination of three market factors, including value, quality and low volatility.
“By combining quality and value, two return-based factors which also have a low correlation to each other, as well as different business cycle dependency (quality late cycle, value early cycle) with low volatility, a factor aimed at reducing the overall risk in a portfolio, an investor may be able to target multiple objectives (reduce risk, increase diversification and seek a higher return stream),” Bender added.
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Additionally, Deutsche Asset Management offers a Comprehensive Factor ETF suite, including Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS), Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF), Deutsche X-trackers Russell 2000 Comprehensive Factor ETF (NYSEArca: DESC) and Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG).
The Duetsche X-trackers multi-factor suite selects components based on a broader five factors, including quality, value, momentum, low volatility and size.