Schneider pointed out that a study conducted by University of Chicago Professor Eugene Fama and Dartmouth College Professor Kenneth French found that focusing on smaller stocks and those with lower relative prices may improve a portfolio’s expected return. Additionally, in a separate research paper, University of Rochester Professor Robert Novy-Marx identified profitability as another factor that enhances expected returns.
SEE MORE: Smart Beta ETFs: Weighing Single- and Multi-Factor Methodologies
When combined, the various factors may help improve a portfolios risk-adjusted returns over time. Schneider explained that the Dimensional Fund Advisors’ multi-factor strategies selects securities of a specific sector with a desired market capitalization range, with an increase emphasis on higher expected return securities. The securities will exhibit lower relative price, higher profitability and lower market capitalization. Moreover, securities’ weights are capped to diminish concentration.
John Hancock has come out with a number of smart beta ETF options that track indices developed by Dimensional Fund Advisors, including the John Hancock Multifactor Consumer Discretionary ETF (NYSEArca: JHMC), John Hancock Multifactor Financials ETF (NYSEArca: JHMF), John Hancock Multifactor Healthcare ETF (NYSEArca: JHMH), John Hancock Multifactor Technology ETF (NYSEArca: JHMT), John Hancock Multifactor Consumer Staples ETF (NYSEArca: JHMS), John Hancock Multifactor Energy ETF (NYSEArca: JHME), John Hancock Multifactor Industrials ETF (NYSEArca: JHMI), John Hancock Multifactor Materials ETF (NYSEArca: JHMA) and John Hancock Multifactor Utilities ETF (NYSEArca: JHMU).
In a survey on the webcast, among the majority of those advisors who have not invested in smart-beta strategies, many pointed to their lack of understanding to a smart-beta strategy as the main impediment to investments, which suggests that the industry still needs to promote investor education before more will utilize these smart beta ETFs.
Financial advisors who are interested in learning more about factor-based smart-beta sector investments can watch the webcast here on demand.