Multi-factor exchange traded funds are an increasingly prominent part of the smart beta landscape. One idea for a multi-factor approach to U.S. equities is the Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS).
DEUS 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.
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.
Quality is now the most expensive of all four valuation multiples while value is the least expensive. Potential investors, though, should keep in mind that value has the second lowest expected earnings-per-share growth rate among the major factors, the highest debt-to-equity ratio and lowest return on equity. Meanwhile, momentum has the highest expected earnings growth.