A well-diversified portfolio will not only focus on opportunities domestically, but also abroad. Furthermore, adding factor-based strategies adds another layer of seeking alpha to maximize gains.
A factor-based strategy that captures the upside in one factor and lessens exposure when one underperforms adds a whole new dimension. This exposes investors to multi-factor diversification while also looking to extract gains when market conditions change.
Rising inflation, rate hikes, and the ongoing pandemic are more than enough reason to utilize a factor-based strategy. Furthermore, being overweight to large-cap equities adds more risk to a portfolio.
Tilting towards small-cap exposure can provide investors with potential opportunities that traditional large-cap exposure may not bring when markets trend higher. Also, getting value exposure is beneficial when markets head lower.
Backed by Morningstar’s strategy, ETF provider FlexShares has a pair of funds that can do all the aforementioned for both developed and emerging economies.
“Our research suggests exposure to both small-cap and value stocks may provide benefits because of the potential low correlation between the factors,” FlexShares said. “A portfolio that tilts toward both small-cap stocks and value stocks may capture outperformance in one factor, even when the other underperforms. At the same time, we believe maintaining exposure to large-cap stocks may reduce tracking error versus the overall market compared to investment products that make larger bets on small-cap or value stocks.”
Two Options From FlexShares
With an emphasis on getting multi-asset exposure and more, FlexShares has a pair of funds that cater to opportunities outside the U.S. Two options to consider for developed and emerging markets exposure are:
- FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (TLTD): TLTD seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar® Developed Markets ex-US Factor Tilt Index. The index reflects the performance of a selection of companies that, in aggregate, possess greater exposure to size and value factors relative to the Morningstar Developed Markets ex-US Index. The index is a float-adjusted market capitalization-weighted index of companies incorporated in developed market countries, excluding the U.S.
- FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE): TLTE seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar® Emerging Markets Factor Tilt Index. The index is designed to reflect the performance of a selection of companies that, in aggregate, possess greater exposure to size and value factors relative to the Morningstar Emerging Markets Index, a float-adjusted market capitalization-weighted index of companies incorporated in emerging market countries.
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