Combining Factors May be a Better Option Than Just Value Itself

The value versus growth debate continues to rage in when it comes to factor investing, but there’s a case to be stated for not only both, but all factors. Rather than just simply focusing on one factor like value, it may serve investors better to capitalize on a multi-factor approach.

“If you’re placing a bet on value as a standalone factor, then maybe you’re doing it wrong,” wrote Simon Moore in Forbes. “Research from Antti Ilmanen and colleagues at AQR has shown that combining factors can lead to improved outcomes and risk management over time.”

“This may not fit how we like to make decisions,” Moore wrote. “We like to know if something works or not. We like to get to yes or no answers. But we can make better decisions by moving away from binary yes or no choices. Historically combining factors has been a neat strategy and a less risky one. That strategy has worked historically continued to work in past years, even as value has lagged. A multi-factor strategy is likely to continue to work in future if history is any guide.”

For multi-factor exposure, investors can check out the Vanguard U.S. Multifactor ETF Shares (BATS: VFMF). The fund seeks to provide long-term capital appreciation by investing primarily in U.S. common stocks with the potential to generate higher returns relative to the broad U.S. equity market through stocks with relatively strong recent performance, strong fundamentals, and low prices relative to fundamentals as determined by the advisor.

For investors looking to add value ETFs to their portfolios, they can look to the Deep Value ETF (NYSEArca: DVP). DVP tracks the Deep Value Index, which is comprised of 20 undervalued dividend paying stocks within the S&P 500 Index with solid balance sheets, earnings and strong free cash flow.

The companies within the Index are weighted based on a rules-based assessment of their valuations so that stocks that are most attractively valued receive a higher weight.

Fund Facts:

  • The Deep Value Index is constructed using an objective, rules-based methodology that begins with an initial universe that mirrors the companies listed on the S&P 500 Index. The universe of companies is then narrowed to include only companies that have positive earnings and returns on invested capital, generate free cash flow, and currently pay a dividend.
  • The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index.
  • Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.

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