TILT the Right Way as Factor Performance Evolves, Shifts

Factor performance is rarely stagnant. It shifts from year to year, as highlighted by an array of recent market data points.

That means advisors and investors have to be nimble and proactive with factor-based exchange traded funds, but that’s easier said than done with single-factor strategies. Those funds are effective when the factor in question is in style, but investors are left vulnerable when that factor falls out of favor.

History shows that value, size, momentum, quality, dividend yield, and low volatility have compelling long-term track records, but as FlexShares Senior Investment Strategist Chris Huemmer notes, it’s vital to understand factors’ cyclical tendencies.

“While each of these factors has been shown to deliver statistically significant returns over time, it’s important to understand that each factor has a unique cycle where there could be prolonged periods of underperformance,” said Huemmer on the FlexShares “Funds in Focus” podcast. “This is why it’s essential to approach factor investing with thorough research—and why it can be particularly challenging to implement a strategy that successfully times factor performance.”

Preparation for a Shifting Factor Environment

Investors looking to cover multiple factor bases while guarding against rapid shifts in the market can consider the FlexShares suite of “tilt” exchange trade funds.

That group is comprised of the FlexShares Morningstar U.S. Market Factor Tilt Index Fund (NYSEArca: TILT), FlexShares Morningstar Developed Markets Ex-US Factor Tilt Index Fund (NYSEArca: TLTD), and the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (NYSEArca: TLTE).

Stocks in each fund are assigned value scores and divided into style boxes, accounting for each fund’s growth and smaller stocks, along with value names. Valuation metrics deployed within the funds are price-to-book, price-to-earnings, price-to-cash-flow, dividend yield, and price-to-sales. The multi-factor approach is valid at a time when factors beyond value are delivering strong showings.

“The size factor has also been a strong performer in the US this year, extending its late 2020 rally into 2021,” adds Huemmer. “Quality has started to outperform as well over the last month of the quarter as investors have started to place greater emphasis on the financial health of a company in addition to its valuation.”

TILT, TLTD, and TLTE don’t just fill the factor void. These funds help advisors eliminate the burden of factor timing.

The trio “offer prolonged factor exposure for a core allocation—without introducing the risk and complexity of timing factor performance,” concludes Huemmer.

For more news, information, and strategy, visit the Multi-Asset 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.