Smart beta exchange traded funds that incorporate multiple factor investment styles are revealing shifts in the current markets, with FTSE Russell Factor indices showing diminished momentum outside the U.S.
“Momentum has had less of an influence in emerging and non-US developed markets in the last six months according to the FTSE Comprehensive Factor Indexes,” according to a FTSE Russell note.
The FTSE Comprehensive Factor Indices, which were developed for the Deutsche X-trackers factor-based ETF suite, are based on five factors recognized as contributing to equity market performance, including quality, value, momentum, low volatility and size. The smart beta ETFs are rebalanced in march and September to ensure an accurate reflection of current market conditions.
“There are a number of single- and multi-factor indexes that have been shown to produce index returns in excess of the broad market benchmark index over the period of our analysis,” Rolf Agather, Managing Director of North America Research for FTSE Russell, said in a note. “And to the extent that the behavior of market factors is cyclical, many indexes are now combining multiple factors to gain diversification. Our new comprehensive factor indexes are designed to diversify the index exposure across our five target market factors in a transparent way.”
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Since their last rebalance in March 21, 2016, the factor indices have shown a decrease in momentum exposure. Meanwhile, the FTSE Emerging Comprehensive Factor Index Active Exposures, which make up the underlying holdings of the Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG), have taken an increase tilt to the value category.
Additionally, the FTSE Developed ex-US Comprehensive Factor Index Active Exposures, which comprise the underlying holdings of the Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF), have seen weights rise in the quality category since the last rebalance.
“The FTSE Comprehensive Factor Indexes tell an interesting story about the rising influence of Value and Quality and the corresponding decrease of Momentum in non-US developed and emerging markets in the last six months,” Rob Bush, ETF Strategist for Deutsche Asset Management, said in a note. “Having said that, factor performance is cyclical and hard to time, hence our analysis of more diversified long term performance of a variety of market factors.”
For more information on factor-based strategies, visit our smart beta category.