Multi-Factor ETFs - Low Cost Quasi-Active Management

By Todd Rosenbluth, CFRA

Should an investor seek out recent winners in a momentum strategy or focus on those securities that continue to trade at a discounted valuation? How about focusing on the blue-chip stocks with the highest quality earnings and balance sheets? Why not all three?

In recent years, the asset management industry seemingly came to an agreement to focus on five factors: quality, momentum, value, low volatility and size. However, CFRA thinks a challenge in using a product focused on a single factor is the patience required when as a factor loses favor, causing the ETF to lose money before bouncing back. For example, iShares Edge MSCI USA Value Factor (VLUE) lost 3.5% in 2015, before bouncing back to rise 15% in 2016.

To appeal to investors who want a combination of quantitative tools, ETF product development in 2015 focused on multi-factor ETFs. Some asset managers partnered with index providers FTSE Russell and MSCI, while others created their own indices or partnered with another asset manager. Combined, the seven U.S.-focused ETFs highlighted below have approximately $3.5 billion in assets. At an Inside Smart Beta ETF conference in June, CFRA Research highlighted the importance of conducting due diligence since the approaches of these multi-factor ETFs are distinct.

iShares Edge MSCI MultiFactor ETF (LRGF) and SPDR MSCI USA StrategicFactors ETF (QUS) both launched in April 2015, leveraging MSCI’s factor efforts. They each incorporate quality and value. To this, QUS adds in low volatility in an equally weighted manner, while LRGF incorporates momentum and size and attempts to maximize factor exposure with an optimizer. Meanwhile, in May 2015, Global X Scientific Beta (SCIU 29) came to market, focused on value, size, momentum and low volatility factors.