Multi-Factor Model Portfolios Well-Suited for Market Uncertainty | ETF Trends

There’s always some element of uncertainty in financial markets, but there are times when that lack of clarity is heightened.

This year, neither uncertainty nor volatility is reaching alarming levels, but failure to prepare is preparing to fail. Advisors can take steps to mitigate equity market uncertainty with multi-factor strategies, an array of which are found in WisdomTree’s suite of multi-factor model portfolios.

“This model uses factor-tilted equity ETFs designed to provide improved risk factor diversification. Our multi-factor models are available in U.S., Developed International, and Emerging Market versions, and can be used as standalone equity models or as complementary sleeves aimed at improving the overall diversification profile of an existing portfolio,” according to the issuer.

The model portfolios are relevant considerations for advisors today due to the lingering uncertainty in the market and the potential for elevated headline risk into year-end.

“There are uncertainties out there: the evolution of the delta and other variants of the COVID-19 virus and its potential impact on schools and lockdowns, inflation potential, fragile geopolitical relationships between the U.S. and China, Russia and Iran and, of course, the events in Afghanistan (which, while fairly insignificant in terms of the global economy and markets, may potentially have an impact on consumer sentiment in the U.S.),” according to WisdomTree research.

Solving for Factor Risk

An obvious benefit of a multi-factor model portfolio is that it eliminates the need to time the strength in individual investment factors. For example, WisdomTree’s US Factor Portfolio is home to exchange traded funds that capitalized on the value rally earlier this year and others that are positioned to benefit when growth stocks rebound, which could happen if economic growth slows.

“The point is not which factors currently are in the lead, but rather the swirling, constantly changing tapestry of leaders. Market conditions can and do change rapidly and are very difficult to predict,” adds WisdomTree. “That is why all WisdomTree Model Portfolios are diversified at both the asset class and risk factor levels—we believe it helps to improve the consistency of performance through various economic and market regimes.”

Another point in favor of the U.S. factor portfolio is its exposure to quality stocks, which is highly relevant to today because there are signs that the quality factor is coming back into style as the economic cycle evolves. The model portfolio sources quality exposure via the WisdomTree U.S. SmallCap Dividend Growth Fund (NasdaqGM: DGRS) and the WisdomTree US Quality Dividend Growth Fund (DGRW), among others.

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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.