Investors looking to tap the benefits of multiple investment factors under the umbrella of a single fund may find the Principal U.S. Mega-Cap Multi-Factor Index ETF (NasdaqGM: USMC) to their liking.
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.
According to a recent Invesco survey, “65% of investors said factor performance had met or exceeded expectations — this following the initial shockwaves the pandemic sent through financial markets,” according to the Invesco report.
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.
Principal Multi-Factor Benefits
Multi-factor ETFs are increasingly prominent options for advisors looking for broad-based, diversified allocations for clients, but the application of multi-factor itself isn’t receiving sufficient attention.
Principal’s multi-factor ETFs are designed to serve as the foundation of an investor’s portfolio, complementing alpha-generating, high active share strategies. As a global asset manager with a heritage of factor investing expertise, Principal now offers a broader set of factor-based strategies to address a wider net of investment objectives and outcomes.
Each of the primary investment factors “contributes its own unique and complementary talents in a team setting. The key to getting the chemistry right is sensible diversification—pairing factors that zig with teammates that zag under a given set of market conditions,” notes Morningstar.
“Invesco noted that factor investors understood that the full effect on their portfolios was not yet clear, but continued to increase factor allocations despite a challenging period and divergent factor performance as they assessed risk and return objectives over a long-term horizon,” according to Invesco. “Investors demonstrated this long-term approach to factor investing through their commitment to value investing. Despite recent underperformance, only 5% of institutional investors and 16% of advisors doubted that value would perform over the full cycle.”
USMC is up more than 4% over the past month.
For more on multi-factor strategies, visit our Multi-Factor 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.