Multi-Factor ETFs - Low Cost Quasi-Active Management

In September 2015, three additional multi-factor ETFs from established active management firms came to market: Goldman Sachs ActiveBeta US Large Cap Equity ETF (GSLC), JPMorgan Diversified Return US Equity ETF (JPUS) and John Hancock MultiFactor Large Cap ETF (JHML). Here, as well, the approaches and the sector exposures are different.

JPUS tracks a FTSE Russell index, and incorporates stocks based on their quality, value and momentum attributes. Meanwhile, GSLC uses these three factors along with low volatility based on a proprietary index. Lastly, JHML tracks an index designed by Dimensional Fund Advisors that focuses on size, value and quality.

Meanwhile, Deutsche X-trackers Comprehensive Factor (DEUS), launched in November 2015, tracks a FTSE Russell index that combined the five above mentioned quality, momentum, size, value and low volatility factors. Relative to some of the other multi-factor products, DEUS has high exposure to industrials (18%) and low exposure to consumer staples (7%). CFRA strong buy-recommended Cummins (CMI) is one such industrial holding.

CFRA Research expects advisors and investors will further seek out multi-factor ETFs that feel more like active management than S&P 500 index-based ETFs and market-cap weighted peers, but are cheaper than the 1.1% expense ratio for a large-cap mutual fund. If they do, we hope they do their homework and look inside the portfolios first.

Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.