Give Factor Investing a Closer Look in Today’s Volatility

The current market conditions present an opportune time for investors to give factor investing a closer look. As the major indexes around the world flux up and down, it could be factor investing that could help screen for opportunities.

“The approach works by scanning stocks for certain attributes called risk factors and seeks to increase an investor’s exposure to those that they believe will deliver the best risk-adjusted returns,” noted Andrew Dougan, Director of Research and Analytics at FTSE Russell, in The Yorkshire Post. “The approach contrasts sharply to traditional stock picking, where investors analyze a single company, reviewing its financial accounts, and speaking to management.”

“Five of the most common factors, momentum, volatility, size, quality, and value, are frequently used by investment managers to construct stock portfolios,” Dougan added. “A listed company’s factor profile can, of course, change over time and many of these risk factors perform differently depending on the economic conditions.”

The strategy is undoubtedly gaining in popularity as more investor education grows. With that, the ETF space can only grow as a prime investment vehicle for factor investing strategies.

“The approach is growing in popularity,” noted Dougan. “FTSE Russell’s annual Smart Beta survey, which looked at whether investors are integrating factors into portfolios, revealed adoption by 58 percent of asset owners and other institutional investors globally in 2019, up 10 percent since 2018. And within this growing field, multi-factor-based investment approaches are also gaining traction. So what about market access to these investment strategies? One way individual investors can gain exposure to risk factors is via ETFs, where a fund passively tracks its underlying index and is traded on exchange, much like a stock.”

Multifactor Exposure at Home and Around the World

To get multifactor exposure right here at home, investors can take a look at ETFs like the WisdomTree U.S. Multifactor Fund (BATS: USMF).

USMF fund facts:

  • Tracks the price and yield performance, before fees and expenses, of the WisdomTree U.S. Multifactor Index.
  • Under normal circumstances, at least 80% of the fund’s total assets will be invested in component securities of the index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities.
  • The index is generally comprised of 200 U.S. companies with the highest composite scores based on two fundamental factors (value and quality measures) and two technical factors (momentum and correlation).

USMF Chart

USMF data by YCharts

In addition, WisdomTree Investments offers actively-managed multifactor ETFs for international exposure via the WisdomTree Emerging Markets Multifactor Fund (NYSEArca: EMMF) and the WisdomTree International Multifactor Fund (NYSEArca: DWMF).

EMMF seeks returns via a transparent actively-managed strategy that invests in emerging market equity securities that have the highest potential for profits based on proprietary measures of valuation, quality, momentum, and volatility reduction factors. DWMF uses a transparent actively-managed strategy, investing in developed market equity securities, excluding the U.S. and Canada, that have the highest potential for returns based on proprietary measures.

For more relative market trends, visit ETF Trends.