Factor Indexing Has Caused a Profound Shift in the Financial Industry

Factor-based investments and smart beta exchange traded fund strategies have moved away from periphery allocations to a more core portfolio holding.

“What we’re really excited about is what I would call the mainstreaming of factor adoption. What I mean by that is when you look across big institutional investors, asset owners, state pension plans, what we’re noticing is they are adopting factor indexes as policy benchmarks. What that means for the industry is now active managers are going to be assessed from a performance standpoint relative to a factor index versus the traditional cap-weighted index. This is a profound shift in our industry,” Mark Carver, Global Head of Factor Index Products, MSCI, said at the Inside ETFs conference.

For example, the iShares Edge MSCI Minimum Volatility USA ETF (USMV) has become a popular single factor-based, smart beta ETF play. USMV tries to reflect the performance of the MSCI USA Minimum Volatility (USD) Index, which measures the performance of large and mid-capitalization equity securities listed on stock exchanges in the U.S. that, in the aggregate, have lower volatility relative to the large- and mid-cap U.S. equity market.

Something like the iShares Edge MSCI Minimum Volatility should help investors participate in any upside potential once the markets begin to rebound, and the ETF should also limit further downside risks or limit any more steep drawdowns in case the markets should grow more volatile, producing improved risk-adjusted returns over the long haul.

Additionally, the iShares Edge MSCI USA Quality Factor ETF (BATS: QUAL) is another famous play. QUAL seeks to track the investment results of the MSCI USA Sector Neutral Quality Index composed of U.S. large- and mid-capitalization stocks with quality characteristics as identified through specific fundamental metrics, such as high return on equity, stable year-over-year earnings growth, and low financial leverage.

Watch Mark Carver Discuss Allocation Shifts In Portfolios:

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