Smart beta exchange traded funds help investors access historically proven factors that have helped drive long-term performance, but over the short-term, specific factors may stand out.
“Quality, momentum, value, size, and minimum volatility have historically been drivers of returns across asset classes,” according to a BlackRock research note. “Because they are driven by different economic rationales, they have tended to outperform at different times. For investors with a shorter time horizon and a reasonable appetite for risk, this cyclicality presents an opportunity to tilt portfolios towards one factor versus another in pursuit of incremental returns.”
Specifically, BlackRock currently holds an overweight outlook on the momentum and low-volatility factors while taking an underweight outlook on quality, size and value factors.
Momentum refers to stocks with strong recent performance that tended to maintain their higher returns. For instance, the iShares MSCI USA Momentum Factor ETF (NYSEArca:MTUM) tracks large- and mid-cap U.S. stocks with relatively high price momentum. The underlying MSCI USA Momentum Index calculates the ratio of each stock’s price returns over the trailing 13 and seven months against volatility over the past three years. Companies are then weighted by their risk-adjusted momentum.
The momentum strategy basically bets that hot movers will continue to rise, so investors would buy high and sell even higher. Investors who want to follow this momentum strategy will be betting on outperforming sectors flying even higher.