“We believe one of the key tenets that makes FlexShares different is that we tie everything to the fundamental needs and objectives of investors,” Huemmer said. “There is not one magic set of factors that suits every objective.”
Additionally, dividend ETF investors who are seeking stability, along with exposure to the growing U.S. markets, can look to the FlexShares Quality Dividend Index Fund (NYSEArca: QDF), FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN) and the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF). The suite includes a group of smart-beta ETFs that focus on both quality and dividends.
“One of our goals was to devise a way to gain confidence that a company’s dividend was well-covered and that the company had the ability to grow that dividend over time,” Huemmer said. “That evaluation of the financial health of the company became our quality factor. The decision to build a strategy that focuses on a lower beta than the market comes from our acknowledgment that some investors prefer the defensive nature of legacy dividend strategies.”
Some investors, though, may see these factor-based investments as a way to time the markets to optimally capitalize on periods when a specific factor is more pronounced. However, as history has shown, it is hard to perfectly time market moves.
“We do not advocate trying to time factors as it is hard to predict the peaks and troughs of the cycle,” Huemmer said. “We recommend that investors take a strategic view and stay invested in a factor through periods of underperformance so that they can profit during periods of outperformance.”
Looking ahead, the markets are anticipating greater penetration of factor based strategies in the fixed-income space, similar to what happened with equity ETFs. Bond ETFs may start to track customized indices that incorporate market liquidity constraints, specific levels of duration or credit scoring models.
“The role of factors in fixed income is still evolving. Similar to what has evolved in the equity world, non-traditionally weighted strategies may help advisors better meet the needs of their clients,” Huemmer added.
For more information on factor based strategies, visit our smart beta category.