Multi-Factor ETF Helps Investors Deal With Election Year Angst | ETF Trends

Election Day is just a few weeks away and as that marquee event draws closer, equity market volatility could increase. However, investors have avenues for not only dealing with pre-election turbulence, but post-election letdowns, too. Consider the Principal U.S. Mega-Cap Multi-Factor Index ETF (NasdaqGM: USMC).

USMC, which tries to reflect the performance of the Nasdaq US Mega Cap Select Leaders Index, is comprised of companies with the largest market capitalization taken from the Nasdaq U.S. 500 Large Cap Index and screened based on a quantitative model. The fund implements a multi-factor indexing methodology during its selection process.

An advantage of USMC’s multi-factor approach is that it can prepare investors’ portfolios for multiple electoral outcomes.

“Promises and proposals made on the campaign trail offer an indication of a candidate’s intentions, but bureaucracy, compromise, lobbying and politics help shape the reality once in office. At the same time, markets don’t always behave as conventionally expected,” according to BlackRock research.

USMC Right Place, Right Time

Individual factors produced uneven returns during different periods or exhibited more cyclical returns. For example, quality and momentum may have outperformed in 2017, but the two factors were also the worst performers in 2016. As a result, investors may want a multi-factor approach, like USMC, as opposed to trying to time single factors. Investors, though, can still tactically over- or underweight single factors to express a market view over the short-term as well.

By not timing individual factors, as so many market participants are apt to do in election years, USMC eases factor timing burdens for investors. That’s meaningful because no one knows exactly what’s coming on Election Day.

“As an election nears, the rhetoric and investor attention to it increase — and markets begin to discount the outcomes and implications. Case in point: Many of the clean energy companies might be expected to benefit under a Joe Biden win, but we see prices already building this in,” according to BlackRock.

Compared to the S&P 500 Index, the Nasdaq U.S. 500 Large Cap Index exhibits a higher overweight to the size and low-volatility factor, along with a smaller tilt toward momentum. The Nasdaq U.S. 500 Large Cap Index also includes a heavier overweight to consumer staples, healthcare, and communication services while underweight industrials, financials, real estate, consumer discretionary, and materials.

For more on multi-factor strategies, visit our Multi-Factor Channel.