Investors who have looked into smart beta strategies may note that single factors may exhibit cyclical trends across varying market conditions. Manasseh also warned that individual factors may be volatile, so investors should consider a multi-factor approach that combines the individual factors as a way to potentially smooth out the ride.
For example, the PIMCO RAFI Dynamic Multi-Factor U.S. Equity ETF (NYSEArca: MFUS), PIMCO RAFI Dynamic Multi-Factor International Equity ETF (NYSEArca: MFDX) and PIMCO RAFI Dynamic Multi-Factor Emerging Markets Equity ETF (NYSEArca: MFEM) are designed to be an improved multi-factor solution and dynamically adjust their factor allocations in an ever-changing market environment.
“RAFI Dynamic Multi-Factor is a smart beta equity strategy that seeks to offer diversified factor exposures through allocations to value, quality, low volatility, momentum, and size,” Arnott said.
Arnott also emphasized the dynamic weighting process that hopes to enhance the valuation of the ETF portfolios. The dynamic aspect starts with an equal weighting to each factor plus an additional weight based on a calculation of a factor’s standard momentum and long-term reversal signal relative to other factors. The additional weights to a specific factor are capped at a max of 15% and a minimum of -15% relative to the equal weights.
The methodology also creates factor portfolios focused on an individual factor other than momentum. These factor based sugroups are reconstituted in four so-called tranches with each tranche reconstituted in each quarter. The staggered rebalancing is intended to diversify risk.
Financial advisors who want to learn more about smart beta and multi-factor investing can watch the webcast here on demand.