A Multi-Factor Advantage at a Fair Price

The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSEarca: GSLC), one of the most successful exchange traded funds to come to market last year, can act as a complement to or as an alternative to traditional capitalization-weighted index funds.

As a multi-factor ETF, part of GSLC’s objective is to provide investors with a broad basket of equities with the potential to top traditional benchmarks, such as the S&P 500, while removing the need to time individual investment factors.

Cap-weighted indices may also expose investors to other fundamental risks as the weighting methodology would attach more weight toward indebted countries or companies Multi-factor benchmarks attempt to avoid such problems. Frequently used factors in multi-factor indexes include, value, growth, quality and low volatility.

Related: Institutional Smart-Beta ETF Adoption is Quickly Rising

GSLC’s “portfolio is divided into four equally weighted sleeves that each tilt toward stocks with a different characteristic of interest. This simple approach is transparent, though a more integrated approach would probably be a bit more efficient. Each sleeve gives over- or underweightings to stocks from the large-cap selection universe based on the degree to which they exhibit the targeted style characteristic,” according to a recent Morningstar note.

GSLC factors include value or how attractively a stock is price relative to fundamentals like book value and free cash flow; momentum or the current up or down trend in a company stock; quality or profitability; and low volatility or the degree of fluctuation in a company’s share price over time.