Pairing Factor ETF Strategies to Improve the Investor Experience

Advisors have lots of smart beta ETFs worthy of consideration. Most of them focus on a single fundamental approach or factor like dividends, low volatility, quality, or value. However, there are some compelling index-based products that combine these approaches. It’s similar to the way active managers select stocks, but these ETFs provide greater transparency and more precision for a lower fee. We think advisors that pair factor ETF strategies will improve the investor’s experience.  

High-Quality Yet Undervalued Stocks Inside  

The American Century US Quality Value ETF (VALQ) is one such fund. VALQ is designed to identify quality companies with sound fundamentals that are selling at attractive valuations and offer the potential for sustainable income. As of early June, companies that met these criteria included Apple, Cardinal Health, Cisco Systems, Gilead Sciences, and Kimberly Clark. While financial stocks tend to be overweighted in value ETFs, the American Century ETF recently had just 5% in the sector. Rather, healthcare, information technology, and industrials stocks were the heftiest weightings for the fund. VALQ has $210 million in assets and a 0.29% expense ratio. 

Reducing Risk With a High-Dividend Strategy 

Another ETF that pairs factors is the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD). SPHD is composed of 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. As of early June, these included Altria, Digital Realty Trust, Kinder Morgan, Simon Property Group, and Verizon Communications. While financial stocks are again popular in many traditional high-dividend ETFs, the sector represented just under 9% of SPHD’s assets. Real estate and utilities were the largest sectors for the fund. SPHD has $3.2 billion in assets and charges a 0.30% expense ratio. 

What About Pairing Quality and Low-Volatility Factors?  

The FlexShares US Quality Low Volatility Index Fund (QLV) does just that. QLV owns top-10 stakes in Berkshire Hathaway, Eli Lilly, Home Depot, Microsoft, and Procter & Gamble. Financials represented 12% of assets, third only to information technology and healthcare. In contrast to SPHD, real estate and utilities were much smaller positions in QLV. Meanwhile, QLV had more information technology exposure than VALQ. QLV has approximately $200 million and charges a 0.22% expense ratio. 

See more: “Dan Philips on a Quality Low Volatility Approach” 

Advisors often think about building ETF portfolios by combining single-factor products based on client risk tolerance and reward-seeking efforts. But by pairing factor strategies in a single ETF, they are likely to provide a more diversified approach. As such, clients will not as quickly wonder why the strategy is out of favor due to market sentiment. 

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