Investors are bombarded with a bevy of data from which to make investment decisions from, but as the extended bull market begins to dissipate, the need to get more strategic with their capital allocation arises. Fortunately, for those who want to incorporate more strategic maneuvers in the market via factor investing, there are more tools at their disposal.
First, investors need to understand what they’re getting into when it comes to factor investing. Part of the challenge with getting more investors on board is that the concept may look intimidating on the surface.
“Factors are common characteristics that affect the risk and performance of individual stocks and portfolios,” said Dimitris Melas, Managing Director and Global Head of Core Equity Research at MSCI. “Factor investing, in essence, reflects the way equity fund managers select stocks and construct portfolios. If you go down the list of how equity fund managers pick stocks and what they look for, you will find a lot of commonality between the characteristics they consider and the main factors.”
Nowadays, investors have access to copious amounts of data and algorithmic tools that can help guide them in their investment decision making. The underlying factors may be the same, but the way information is used in the present time is a far cry from yesteryear.
“Investors now have better tools to deploy their asset allocation in a more refined manner,” said Head of Equity Applied Research for Americas and EMEA at MSCI, Raman Aylur Subramanian. “They now have a set of index solutions at their disposal to help them create a rules-based investment process to harvest risk premia from factors. The factors in the market remained the same, so value remains value but the way the premia is captured is what has changed.”
Investors who want factor-based, smart beta fixed income options with exchange-traded funds (ETFs) can look at the ProShares S&P 500 Bond ETF (NYSEArca: SPXB). The fund seeks investment results that track the performance of the S&P 500®/MarketAxess Investment Grade Corporate Bond Index, which consists exclusively of investment grade bonds issued by companies in the S&P 500.
Additionally, investors can also get smart beta strategies from funds like the Invesco Multi-Factor Income ETF (CBOE: IMFI). IMFI follows the Invesco Multi-Factor Income Index. That benchmark “is designed to provide multi-factor exposure to fixed income securities in the following weights: 25% in mortgage-backed securities, 25% higher-quality US investment-grade, 25% high yield, and 25% emerging markets debt,” according to Invesco.
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