Investors who are accustomed to exchange traded funds may be beginning to look toward factor based or smart beta strategies that screen for specific characteristics to potentially enhance returns.
“Our clients are using smart beta indexes as tools to help them pursue a wide range of their objectives, notably higher dividend yields, lower volatility, return enhancement and diversification,” Ken O’Keeffe, managing director of global ETFs at FTSE Russell, said in a note. “And our analysis continues to show that combining multiple factors, not just a single factor, in a smart beta index can help market participants see the benefits of diversification across a number of factors which perform differently across different time periods.”
The various market factors have helped investors outperformed traditional beta index ETFs that weight holdings based on market capitalization.
For instance, over 2016, the underlying indices for the SPDR Russell 1000 Low Volatility Focus ETF (NYSEArca: ONEV) rose 16.2%, SPDR Russel 1000 Momentum Focus ETF (NYSEArca: ONEO) gained 12.7% and SPDR Russell 1000 Yield Focus ETF (NYSEArca: ONEY) increased 23.3%, whereas the SPDR Russell 1000 ETF (NYSEArca: ONEK) added 11.1%.
“Two of three Russell 1000 Focused Factor indexes outperformed the benchmark Russell 1000 index in January,” Tom Goodwin, senior index research director at FTSE Russell, said, referring to the momentum and yield factors. “This follows strong 2016 performance in which all three outperformed the market-cap weighted benchmark. These results highlight the potential benefits of a multi-factor smart beta index that combines multiple factors together in helping to deliver a specific objective to investors.”
Along with screening for large-cap U.S. stocks taken from the Russell 1000 for high value, high quality and low size characteristics, the underlying indices of the various factor-based SPDR ETFs also screen for their respective target strategies, with ONEV focusing on the low-volatility factor, ONEO on high momentum and ONEY on high yield.
Moreover, ETF investors may also combine all these factors together to help smooth out the ride as the various factors may perform differently in various market environments. The Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS) tracks large-cap stocks based on the five factors of quality, value, momentum, low volatility and size.
For more information on factor based strategies, visit our smart beta category.