Finding the Right Factor ETF for Your Portfolio

Factor investing has become an increasingly sought-after method for investors to enhance a diversified portfolio. The truth is, that until recently, it was difficult to accurately identify and purchase a subset of stocks based on characteristics such as volatility, momentum, size, and quality. Those traits were wholly subjective to a fund managers’ interpretation rather than given the objective data-driven solutions they deserve.

Fortunately, the proliferation of exchange-traded funds over the last half decade have solved this issue and have proven to be one of the hottest trends in investment allocation methods. One of the more well-known suites of factor ETFs are the following series developed by BlackRock:

  • iShares Edge MSCI USA Value Factor ETF (VLUE)
  • iShares Edge MSCI USA Quality Factor ETF (QUAL)
  • iShares Edge MSCI USA Momentum Factor ETF (MTUM)
  • iShares Edge MSCI USA Min Vol ETF (USMV)
  • iShares Edge MSCI USA Size Factor ETF (SIZE)

Factor ETFs Offer a Unique Mix for Your Portfolio

Each of these funds offers a unique mix of between 125 – 200 large and midcap stocks culled from the U.S. markets based individual factor tilts. The one outlier being, SIZE, which has over 600 holdings of smaller capitalization stocks relative to its mega-cap slanted peers.

The weighting of the holdings in the iShares products is distributed according to market-capitalization criteria similar to popular domestic benchmarks such as the S&P 500 Index. This makes them suitable to be paired with more diversified total market funds to shape specific risk or objective qualifications.

One of the more attractive qualities of these smart beta indexes are their extremely low costs. All of these ETFs sport embedded expense ratios of 0.15%, making them quite efficient and affordable to own. This is likely why billions of dollars have migrated from high fee mutual funds to these streamlined ETFs.

The following table shows the performance of these iShares factor ETFs over the last one and three years versus the iShares S&P 500 ETF (IVV).

Investors have the capability to use these tools in several distinct ways: