Smart beta or factor-based ETFs are a relatively new investment innovation in the ETF industry, but investors can still find some strategies with a proven track record.
On the recent webcast (available On Demand for CE Credit), Power Up Your Portfolio with Multi-Factor Investing, Marc Chaikin, CEO of Chaikin Analytics, pointed out that having a proven method with a track record is important to many investors, and that is exactly what the Chaikin Analytics-backed, multi-factor IQ Chaikin U.S. Small Cap ETF (NasdaqGM: CSML) and IQ Chaikin U.S. Large Cap ETF (NasdaqGM: CLRG) can provide for investors.
Looking ahead, Chaikin painted a relatively rosy picture for the equity market for 2018. While the bull market is maturing, it is not over yet. Consequently, investors should be more mindful of picking good company exposure and avoiding potential losers. Consequently, he argued that investors should look to stocks with solid fundamentals.
“We believe in order to make money in 2018 it will be critical to buy stocks that have solid growth prospects, balanced with reasonable valuation factors and a good technical backdrop,” Chaikin said.
As a way to target more solid company stocks with strong fundamentals, investors can look to factor-based investment approaches. Salvatore Bruno, Chief Investment Officer and Managing Director of IndexIQ, showed that many ETF investors have done just that, with single-factor ETF assets under management rising to over $500 billion as of the end of last year. Some of the most common factors that have been identified historically included size, value, quality, momentum and low volatility.
However, the single-factor approach may come with their own limitations. Bruno pointed out that single factors have been highly cyclical from year-to-year. On the other hand, investors may look to combined multi-factor strategies to create a more diversified solution and potentially enhance returns over time. Additionally, most factor returns are generally not highly correlated, which combining them a great way to diversify a portfolio.
For instance, the momentum factor was the best performing single factor of 2017, but it was also the worst performing single factor of 2016. On the other hand, the size factor was the worst performing factor of 2017 but it was also the best performing factor of 2016.