A Multi-Factor ETF Weighted Toward Technology, Healthcare

Smart beta is one of the fastest-growing segments in the exchange traded funds universe and within that realm, multi-factor ETFs are increasingly popular.

Over the past few years, money managers and fund sponsors started to roll out rules-based, transparent index ETFs that combined some of the attributes that have historically provided active managers with outperformance, such as prominent investment factors like quality, momentum, value, low volatility and size.

The iShares FactorSelect MSCI USA ETF (NYSEArca: LRGF) is one multi-factor that is thriving. LRGF holds 140 stocks with its two largest sectors weights being technology and healthcare. The ETF’s emphasized factors include momentum, quality and value.

“This fund seeks to maximize its aggregate exposure to stocks with attractive value, momentum, small size, and quality characteristics, while matching the risk level of its parent index, the MSCI USA,” said Morningstar in a recent note. “To achieve this, the fund constructs a portfolio using an optimizer that balances each stock’s targeted factor characteristics against its risk. This can lead to inconsistent factor loadings through time because the optimizer shrinks its allocation to factors as their volatility increases.”

iShares’ FactorSelect ETFs also track smart-beta indices that select components based off four factors, including quality, momentum, value and size. LRGF is part of a five ETF suite of factor select ETFs from iShares, the world’s largest ETF issuer.