A Multi-Factor ETF Racing to New Highs

In just over two years on the market, the Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS) is quickly becoming a venerable option among U.S. equity multi-factor ETFs.

DEUS closed modestly higher Tuesday, reaching a record high while extending its year-to-date gain to 4.5%. The ETF “seeks investment results that correspond generally to the performance, before fees and expenses, of the Russell 1000 Comprehensive Factor Index. The index is designed to provide exposure to domestic equities based on five factors – Quality, Value, Momentum, Low Volatility and Size,” according to Deutsche Asset Management.

Traders have often used single factor ETFs to tactically increase or decrease exposure to a desired factor or rotate out a factor exposure in a changing market environment. But there are risks with single factor strategies.

Quality is now the most expensive of all four valuation multiples while value is the least expensive. Potential investors, though, should keep in mind that value has the second lowest expected earnings-per-share growth rate among the major factors, the highest debt-to-equity ratio and lowest return on equity. Meanwhile, momentum has the highest expected earnings growth.

Value stocks typically cover companies that trade at a lower price relative to fundamentals such as dividends earnings and sales, which are then considered undervalued by a value investor.