In recent years, multi-factor ETFs proliferated at a rapid rate, but proper implementation of these funds still confounds some advisors and investors.
The U.S. Multi-Factor Portfolio, part of WisdomTree’s series of Modern Alpha model portfolios, guides advisors with a diverse basket of factor-based strategies.
“This model portfolio is designed for investors with a long-term horizon looking for exposure to a broad universe of U.S. equities primarily using factor focused ETFs,” according to WisdomTree. “The selected ETFs provide certain factor tilts that have the potential to generate excess return relative to comparable cap-weighted benchmarks over longer-term holding periods. The strategies may use both WisdomTree and non-WisdomTree ETFs.”
Examining a Cornerstone
One of the pillars of this WisdomTree model portfolio is the WisdomTree U.S. Multifactor Fund (CBOE: USMF). USMF tracks the WisdomTree U.S. Multifactor Index, which is generally comprised of 200 U.S. companies with the highest composite scores based on two fundamental factors (value and quality measures) and two technical factors (momentum and correlation).
Under normal circumstances, at least 80% of the fund’s total assets will be invested in component securities of the index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities.
“The case for multifactor funds is essentially the case for diversification, which Nobel Memorial Prize-winning economist Harry Markowitz has described as the only ‘free lunch’ in investing,” according to Morningstar research.
Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). Value investing is a popular long-term investment strategy. Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul, but that has not been the case for more than a decade.
However, USMF takes a fresh approach to value. Traditional value funds are often weighted financial services stocks, but USMF devotes less than 10% of its weight to that sector.
Actually, a case can be made USMF tilts more toward quality and growth than it does value because technology and healthcare stocks combine for over 41% of the fund’s weight while consumer cyclical and communication services combine for over 23%.
If an investor wants to shore up a portfolio with a defensive play, one may target quality or companies with quality of earnings. In other words, USMF is relevant in today’s climate but can serve as a durable bedrock for long-term portfolios.
For more on cornerstone strategies, visit our ETF Building Blocks 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.