Multi-Factor Investing Has Sector-Level Utility | ETF Trends

Multi-factor ETFs are often viewed as broad market ideas, but the strategy has applications at the sector level with one example being the John Hancock Multifactor Consumer Staples ETF (NYSEArca: JHMS).

JHMS is part of an expansive lineup of multi-factor sector ETFs sponsored by John Hancock. The underlying indices’ methodology is managed by Dimensional Fund Advisors, a pioneer in applying insight from academic research to a systematic investment process that pursues higher expected returns through advanced portfolio design and implementation.

The smart-beta ETFs follow a rules-based selection process that is seen as a multi-factor approach, combining a number of factors in a single portfolio. Securities are adjusted by relative price and profitability. The underlying indices may overweight stocks with lower relative prices and underweight names with higher relative prices. The indices can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability.

JHMS Looks Strong

“John Hancock Multifactor Consumer Staples ETF has just $20 million in assets, and now earns a five-star rating from CFRA due to its appealing reward/risk combination and reasonable costs,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Monday.

The underlying benchmarks of the Hancock sector ETFs, including JHMS, also implement market-capitalization adjustments where they increase the weights of smaller companies within the eligible universe and decrease the weights of larger names. The weighting methodology helps the ETFs follow a more equal-weight tilt with greater exposure to smaller companies than traditional market-cap weighted index funds in an attempt to capture the size premium and limit risks associated with high-flying, large-cap stocks that may be overbought in an ongoing bull market rally.

JHMS, like its stablemates, emphasizes the size, profitability, and low relative price factors.

Staples are extending a run of being sturdy amid the COVID-19 outbreak as the public seeks refuge within their homes, amid a haven of Clorox bleach, Coca-cola, and toilet paper. These are goods that will continue to be necessary regardless of the landscape, and some states are even mandating that stores remain open to sell them.

“Some of the improvements we saw occurred at the holdings level,” said Rosenbluth regarding JHMS. “For example, CFRA Equity Analyst Garrett Nelson lifted his recommendation of key constituent Phillip Morris International to Strong Buy from Buy in late April. With its elevated dividend yield, highly inelastic product demand, robust gross margins, and global footprint that helps mitigate risk, PM is now one of Nelson’s top ideas.”

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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.