Exchange traded funds allow investors to cheaply and easily access widely observed benchmark indices and markets. As investors grow more sophisticated, more are turning to the next evolution in passive index funds: smart beta.
ETF Trends publisher Tom Lydon spoke with Abby Woodham, ETF Strategist for Deutsche Asset Management, at the 2017 Morningstar Investment Conference in Chicago April 26-28 to talk about multi-factor, smart beta strategies in the ETF space.
Woodham pointed out that the first evolution of smart beta began with single factor strategies, such as value, momentum and low volatility. As investors grow more comfortable with ETFs and the various investment styles available, more clients are asking for cheap ETF portfolios that combine these various factors into a multi-factor strategy, which many actively managed funds already implement.
“When you construct a multi-factor strategy, you essentially have two choices: You could construct a portfolio of four or five single factor ETFs or one ETF that combines all the factors together,” Woodham said. “We call that latter one the comprehensive factor approach. That’s how we construct our ETFs.”
For instance, the popular Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS) underlying index combines five single factors into a multi-factor strategy, including value, size, momentum, low volatility and quality.
FTSE Russell has also helped Deutsche craft a number of so-called Comprehensive Factor Indices to go along with their corresponding smart beta, multi-factor ETFs. Deutsche Asset Management offers a Comprehensive Factor ETF suite, including Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF), Deutsche X-trackers Russell 2000 Comprehensive Factor ETF (NYSEArca: DESC) and Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG), along with their flagship DEUS.
Woodham pointed out that clients and investors turning to these multi-factor, ETFs have consistently mentioned higher returns and lower volatility as key selling points for smart beta, index-based funds. Investors would either carve out a piece of their traditional beta exposure or replace a more expensive actively managed fund with a quantitative, multi-factor ETF strategy.
For more on smart beta ETFs, visit our Smart Beta Channel.