As investors look to smart beta strategies to fill out a diversified portfolio, many are considering a multi-factor ETF that could address the shortcomings or cyclical nature of specific factor tilts and potentially better diversify a portfolio over the long haul.
“The challenge with smart beta is that many of those strategist focus on just one factor,” Simeon Hyman, Head of Investment Strategy at ProShares, said at the recent Morningstar ETF Conference. “If you pick one factor – maybe it’s value or go momentum, there’s cyclicality there. Sometimes, you’re right and sometimes you’re wrong. Our approach is a different take.”
For instance, the ProShares Large Cap Core Plus (NYSEArca: CSM), which overweights attractive stocks while taking a short position in unfavorable stocks, may be seen as a type of smart beta, long-short strategy.
CSM starts off with the company stocks of 500 leading large-cap U.S. companies, which are then scored based on the expected outlook for each stock using the 10 equal-weighted screens, including historical growth, expected growth, profit trends, accelerating sales, small size, price reversal, price momentum, earnings momentum, relative value and traditional value.
“It takes a multi-factor approach that blends various smart beta factors for a great consistency of performance,” Hyman said.
The underlying index then optimizes the portfolio, using the scores of the 10 screened factors to overweight stocks with the most favorable outlooks and underweight or short positions in company stocks with less favorable prospects. Lastly, the portfolio will end up with 130% long exposure and 30% short exposure, based on the weightings from the factor scores.
“If you’re looking for a tactical trade, by all means focus on a single factor smart beta ETF, but if you’re looking for buy-and-hold, you can look to a multi-factor approach,” Hyman added.
CSM has outperformed on a consistent basis. The smart beta ETF is up 17.4% year-to-date, compared to the S&P 500’s 17.3% return. The fund also generated an average annualized return of 17.1% over the past five-years, compared to the S&P 500’s 16.1% return.
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