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.
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.