A Smart, Dynamic ETF Approach to Market Exposure | ETF Trends

Equity investors face some challenges in today’s environment, but people can look to multi-factor ETFs in seeking enhanced return and diversification potential.

On the recent webcast (available On Demand for CE Credit), Arnott on Smart Beta: A Better Way Forward with Multi-Factor, Raji O. Manasseh, Equity Strategist at PIMCO, warned that future returns are likely to be lower in light of strong returns achieved since the financial crisis, projecting lower single-digit returns for many markets in the years ahead as opposed to the double-digit returns that we have previously enjoyed.

While there is still an ongoing desire for alpha generation, many have grown dissatisfied with the high costs and underperformance in many actively managed fund strategies, notably those in U.S. equities, Manasseh added.

Consequently, Manasseh pointed to the rising demand for smart beta strategies, especially multi-factor investments, among financial advisors seeking to enhance returns while managing downside risks.

Robert Arnott, Founder and Chairman of Research Affiliates, highlighted the academically and historically backed data that showed certain equity factors have been linked to enhanced returns, notably factors like momentum, value, size and quality. These types of factor investments have been traditionally associated with actively managed investments, but now, investors may find rules-based indexing methodologies that incorporate these active factors in a low-cost ETF investment wrapper.

At Research Affiliates, Arnott marked the so-called fundamental indexing methodology that focuses on factors like sales, cash flow, dividends and book value to break the link between prices and portfolio weights. In contrast, traditional market capitalization-weighted indexing methodologies inherently overweight overpriced companies and underweight underpriced companies, which could result in a return drag.