The coronavirus pandemic certainly tilted the capital markets upside down globally and one way investors have been combating the fluctuations in the market is via factor investing. However, which factors tend to work best in the current market environment is one that is up for debate.
“In such tumultuous circumstances it is easy to lose conviction in the fundamental principles of investing, but these will certainly survive this crisis just as they have all previous ones,” said Georg Elsaesser, senior portfolio manager, Invesco Quantitative Strategies. “We need to keep a balanced perspective.”
With the pandemic providing an unhealthy dose of uncertainty in the markets, factor investing can help investors navigate the current market environment.
“With global markets in turmoil, factor investing provides a method for investors to screen for opportunities by scanning securities for attributes that seek to increase exposure to factors, or quantifiable characteristics, that the investor believes will deliver the best risk-adjusted returns,” wrote Zainab Kufaishi, head of the Middle East and Africa, Invesco, in a Saudi Gazette report. “Due to the low correlation factors have with each other, diversifying across factors is one way to weather different economic environments, as some factors are less sensitive to economic shocks than others.”
So, which factors are working best in today’s market environment. Investors may want to pay attention to factors, such as quality and low volatility—this all makes sense given the market’s sensitivity to news regarding the coronavirus pandemic.
“For instance, we have found that the equity factors producing the best returns in the equity market downturn have been quality, low volatility, and momentum, whereas other factors have exhibited greater sensitivity such as value, size, and yield,” said Elsaesser.
A Multi-Factor, International ETF Option
Another way for investors to get factor exposure is via a multi-strategy approach. One way investors can get multiple factor exposure as well as international diversification is via the Principal International Multi-Factor Core Index ETF (PDEV).
PDEV seeks to provide investment results that closely correspond to the performance of the Nasdaq Developed Select Leaders Core Index. Under normal circumstances, 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 at the time of purchase.
Furthermore, the index uses a quantitative model designed to identify equity securities of companies in the Nasdaq Developed Market Ex-US Ex-Korea Large Mid Cap Index that exhibit potential for high degrees of sustainable shareholder value, growth, and strong momentum.
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