Investors looking to diversify can consider an ETF strategy that alternates its tilt toward S&P 500 investment factors as the market itself changes.
In the recent webcast, Factor Rotation Strategies May Help You Profit in Varying Market Cycles, Sean O’Hara, President, Pacer ETFs Distributors; and John Lunt, President, Lunt Capital Management, explained that public instruments have characteristics and attributes that can be calculated and tracked. These factors include the likes of momentum, quality, value, and low volatility. Factors describe the behavior or reflect the fundamentals of an investment. Factor investing involves tilting portfolios toward or away from specific factors in an attempt to generate outperformance.
Factors help investors generate long-term benefits. Academic research and industry analysis demonstrates the long-term outperformance of key factors including momentum, quality, value, and volatility. However, the long-term factor outperformance can mask years of factor underperformance as data shows factors move in and out of favor over shorter periods.
Momentum describes the tendency of high-performing stocks to continue performing well in the near future. Quality covers the characteristics that contribute to a company’s durable business model and sustainable competitive advantage. Value is a measurement of a stock’s market value relative to its intrinsic value. Lastly, volatility covers the measurement of variance of returns for a security or index.
To help investors better-adapt as market conditions change, Lunt Capital has expanded the factor opportunity set to include both traditional and non-traditional factor groups, embracing a rules-based, objective, and tactical strategy to rotate between factors moving in and out of favor.
Lunt explained that traditional factors include standard-side factors like high momentum, high quality, high value, and low volatility. Additionally, he highlighted non-traditional or opposite-side factors like low momentum, low quality, low value, and high volatility.
The Pacer Lunt Large Cap Alternator ETF (ALTL) is an index-based ETF that aims to rotate between high-beta and low-volatility stocks listed in the S&P 500 Index.
The high-beta index is an index comprised of stocks that are most sensitive to changes in market returns. High-beta stocks tend to be market leaders during the most positive times for the market.
The low volatility index is an index comprised of stocks that exhibit lower price volatility than the overall market average. According to academic research, low-volatility stocks have historically generated better risk-adjusted returns over time.
Additionally, the Pacer Lunt Large Cap Multi-Factor Alternator ETF (PALC) is a passively managed fund that rotates amongst value, quality, volatility, and momentum stocks within the S&P 500 Index.
The Pacer Lunt Large Cap Multi-Factor Alternator ETF starts out by differentiating a segment universe by factors. The methodology then evaluates and ranks factor pairs by traditional and non-traditional means. The whole process is re-evaluated on a monthly basis.
Financial advisors who are interested in learning more about the factor rotation strategy can watch the webcast here on demand.