When taking on a factor-based strategy, value investing and small cap investing may not be optimal now, but over the long run, it could be beneficial for investors who have the patience. The coronavirus pandemic is pushing investors into momentum-based equities and the safe haven of large caps, but value and small-caps are not to be ignored when looking at past performance.
That said, can value and small cap investing work now?
“Looking at just the last ten years, one might say no, but the last two decades combined yielded favorable returns,” wrote Rick Miller in a Forbes article. “More broadly, the factors have paid off historically, but since ‘everyone’ knows about them now, their advantages might disappear.”
However, before diving into a factor-based strategy, investors have to be mindful of some potential challenges ahead.
“There’s no guaranteed value or small will outperform and the results may be slow in coming. Will you have the patience to wait? By its very nature, a factor portfolio will perform differently than the overall market. Will you have the persistence to stick with your approach even when other approaches (including some used by your friends) seem to fare better,” Miller said. “Both factors enjoyed very attractive performance advantages in the aughts. Realizing that kind of advantage in the future, if it ever appears again, will require patience and determination.”
A Multi-Factor Approach
Another way to navigate the markets is to use a multi-factor approach. Here are a couple of funds to consider:
- Principal U.S. Large-Cap Multi-Factor Core Index ETF (PLC): seeks to provide investment results that closely correspond, before expenses, to the performance of the Nasdaq US Large Cap Select Leaders Core Index. The index uses a quantitative model designed to identify equity securities of companies in the Nasdaq US Large Cap Index that exhibit potential for high degrees of sustainable shareholder value, growth, and strong momentum.
- Principal U.S. Small-Cap Multi-Factor Index ETF (PSC): PSC seeks investment results that closely correspond, to the performance of the Nasdaq US Small Cap Select Leaders Index. The fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the index. The index uses a quantitative model designed to identify equity securities (including growth and value stock) of small-capitalization companies in the Nasdaq US Small Cap Index (the “parent index”) that exhibit potential for high degrees of sustainable shareholder yield, pricing power, and strong momentum, while adjusting for liquidity and quality.
For more relative market trends, visit ETF Trends.