The universe of smart beta exchange traded funds continues expanding, both in population and assets under management, and U.S. equities remain fertile ground for issuers bringing fundamentally-weighted strategies to market.
Multi-factor ETFs are increasingly popular, a theme highlighted by an array of ETFs, including the Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS). DEUS, which hit an all-time high last Friday, makes accessible to investors a multi-factor strategy previously seen in the world of active management with cost advantages and efficiency of the ETF wrapper.
DEUS selects components based on a broad set of five factors, including quality, value, momentum, low volatility and size.
These factors have been traditionally found in actively managed mutual fund strategies, but as index-based ETF strategies move beyond the traditional market capitalization-weighted methodology, more money managers are crafting customized passive index-based ETFs that incorporate active styles or factors.
The ETF follows the Russell 1000 Comprehensive Factor Index and holds 835 stocks. Factor investing combines low-cost, systematic approach found in passive investments with research driven benchmark outperformance found in actively managed portfolios and cutting edge alpha capture in alternative strategies.
Single factor-based, smart-beta ETF strategies can be used to target specific long-term risk premia. Traders have often used single factor ETFs to tactically increase or decrease exposure to a desired factor or rotate out a factor exposure in a changing market environment. But there are risks with single factor strategies.
Historical data indicate various factors perform well in particular years while others lag, making it difficult for investors to time exactly when one factor will outperform others. The difficulty in factor time underscores the utility of a multi-factor approach such as the one offered by DEUS.
DEUS allocates a combined 36% of its weight to industrial and consumer discretionary stocks. The financial services and technology sectors combine for 28.4% of the ETF’s weight.
DEUS has rapidly gained traction with investors as highlighted by the ETF’s nearly $78 million in assets under management, an impressive sum considering the ETF debuted in October.
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