Mutli-factor ETFs, many of which are just a few years old, have been receiving considerable attention, much of it positive this year. However, one of the group’s most venerable constituents remains compelling.
The ProShares Large Cap Core Plus (NYSEArca: CSM) is almost 10 and a half years old, making it one of the most seasoned members of the multi-factor fray.
Prosaic multi-factor multi-factor ETFs select companies through exposure to a subset of multiple market factors, including low volatility, momentum, quality, size and value factors. Investors can use these multi-factor strategies to capitalize on the cyclicality of factor performance through a dynamic overlay that screens for leading economic indicators and market sentiment to gauge the current market environment and increase exposure to the areas that tend to fare best in the given conditions.
In the case of CSM, the fund overweights attractive stocks while taking a short position in unfavorable stocks, may be seen as a type of smart beta, long-short strategy.
CSM starts off with the company stocks of 500 leading large-cap U.S. companies, which are then scored based on the expected outlook for each stock using the 10 equal-weighted screens, including historical growth, expected growth, profit trends, accelerating sales, small size, price reversal, price momentum, earnings momentum, relative value and traditional value.
Investment Factor Focus
Investment factors have exhibited specific characteristics that allowed them to outperform their peers. For example, low volatility include stocks that exhibit lower volatility tend to perform better than stocks with higher volatility. Momentum refers to stocks that rise or fall in price tend to continue rising or falling. Value covers stocks that appear cheap tend to perform better than stocks that appear expensive. Quality or higher quality companies tend to perform better than lower quality companies. Size or smaller companies tend to perform better than larger companies. Lastly, yield or higher yielding stocks tend to perform better than stocks with lower yields.
In other words, factor timing is difficult, but CSM eases some of that burden via its straight-forward long-short strategy and the results are rewarding for investors.
“Outperformance is rare in large cap,” according to ProShares. “Ninety-two percent of actively managed large-cap mutual funds and ETFs failed to beat the S&P 500 over time, and most passive strategies are designed only to match market returns. But CSM’s index has outperformed the S&P 500 from inception (4/21/08) through 09/30/19.”
For more on core investing strategies, please visit our Core ETF Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.