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.
“Single factors have been highly cyclical from year to year, and timing can be a difficult endeavor. Combining multiple factors creates a more diversified solution to potentially enhance returns over time,” Bruno said.
As a way to diversify and potential enhance returns, the Chaikin Analytics approach found under CSML and CLRG combine various proven factors, notably value, growth, technical and sentiment.
The value factor includes screens like LT debt to equity ratio, price to book value, return on equity, price to sales ratio and free cash flow. Technical factors cover price trend, price trend rate of change, relative strength vs. market and volume trend. Growth factors include earnings growth, earnings surprise, earnings trend, projected P/E ratio and earnings consistency. Lastly, the sentiment factor screens for earnings estimate trend, short interest, insider activity, analyst ratings and industry relative strength.
“The IQ Chaikin suite provides exposure to domestic small-cap and large-cap equities through a proven multi-factor model, the Chaikin Power Gauge, making them ideal core portfolio solutions,” Bruno said. “The Chaikin Power Gauge combines four primary factors – value, growth, technical, and sentiment – to select stocks with the potential to provide enhanced returns across market cycles.”
Financial advisors who are interested in learning more about multi-factor investments can watch the webcast here on demand.