Traditionally, multi-factor exchange traded funds offer investors exposure to three or four investment factors. The WisdomTree U.S. Multifactor Fund (Cboe: USMF) eschews that approach to focus on the quality and value factors.
USMF tries to reflect the performance of the WisdomTree U.S. Multifactor Index, which is generally comprised of 200 U.S. companies screened for fundamental factors value and quality, along with technical factors momentum and correlation. While USMF is not an old multi-factor ETF, it is proving its mettle against some rival strategies.
“The 10 largest Multifactor exchange-traded funds (ETFs) in the market hold over $10.5 Billion in assets and saw $1.8 billion of net inflows over the last fifteen months,” said WisdomTree in a recent note. “In the beginning of that time frame, specifically 6/29/2017, WisdomTree entered itself into the fray launching the WisdomTree U.S. Multifactor Fund (USMF). We are pleased to announce that since its inception, USMF outperformed all 10 of these Multifactor ETFs on both an absolute and risk-adjusted basis. In fact, of these 10 ETFs, USMF exhibited the third lowest volatility, with the 2 lower volatility ETFs achieving their risk reduction at the cost of being the worst 2 in performance.”
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Defining Factors
Within USMF, value is determined by fundamental valuation ratios, such as price-to-book, price-to-sales, price-to-earnings. Quality is determined by profitability ratios and the growth of these ratios over time, including return on equity and return on assets. Momentum is determined by a stock’s risk adjusted returns over multiple periods of time. Lastly, correlation is defined as each company’s correlation with a broad market index.
“Given that our conviction in our factor-based stock selection model is high, we view more active share as increasing the chance for better fundamentals, superior returns, and less volatility than the market,” said WisdomTree. “This is also one reason why we incorporate sector neutrality and the low correlation factor, to help mitigate sector and market risk, and to magnify the effects of our high conviction stock picking.”
USMF holds 200 stocks, none of which exceed weights of 1.48%. The fund devotes 39.27% of its combined weight to technology and healthcare stocks.
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