Through a multi-factored approach, these new smart-beta ETFs try to deliver enhanced returns and maximize diversification in an attempt to provide potentially improved risk-adjusted returns, compared to traditional market-capitalization-weighted indices.
Specifically, some argue that cap-weighted indices may put an investor at risk of chasing a rally since the best performing stocks would gain the most assets and typically have the largest weight in an index.
“For the value effect, the risk-based explanation seems best. Value stocks tend to have less-attractive prospects than their more-expensive counterparts and may offer higher expected returns as compensation for their higher risk. But behavioral biases could also contribute. Investors may extrapolate past growth (or lack thereof) too far into the future, which may cause the market to undervalue slower-growing value stocks,” adds Morningstar.
Morningstar rates LRGF “bronze” due in part to the fact that the ETF is just under two years old.
For more information on multi-factor strategies, visit our smart beta category.