Whether it’s momentum, volatility, size, quality, or value, there is no one-size-fits-all solution when it comes to factor investing. This is where multi-factor funds can assist, and one place to start is the strongest 2021 performers.
Given varying market conditions, investors often need more than just one factor. The potential benefits an investor can reap using a multi-factor approach becomes fully apparent when considering that a single factor does not allow for adaptability when the market environment changes.
“Multifactor strategies build upon the long-standing concept of diversification: that combining exposures to multiple drivers of returns — otherwise known as factors — can help soften the effect of drawdowns and increase the potential for outperformance,” ETF provider BlackRock notes on its website.
“As anyone who has ever completed a puzzle understands, it is not simply about having the right pieces; it’s also about combining the pieces in the way that achieves the desired outcome,” BlackRock added. “We believe the same is true for types of multifactor portfolios: seemingly simple differences can meaningfully affect portfolio exposures and, ultimately, performance.”
As such, here are three multi-factor ETFs to consider:
- John Hancock Multifactor Energy ETF (JHME): Seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the John Hancock Dimensional Energy Index. The fund normally invests at least 80% of its net assets in securities that compose the fund’s index. The index is designed to comprise securities in the energy sector within the U.S. Universe whose market capitalizations are larger than that of the 1001st largest U.S. company at the time of reconstitution. The fund is up 30% within the last six months.
- Principal U.S. Small-Cap Multi-Factor ETF (PSC): Seeks investment results that closely correspond to the performance of the Nasdaq US Small Cap Select Leaders Index. The fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the index. The index uses a quantitative model designed to identify equity securities (including growth and value stock) of small-capitalization companies in the Nasdaq US Small Cap Index that exhibit potential for high degrees of value, quality growth, and strong momentum, while adjusting for liquidity and volatility.
- Invesco Russell 2000 Dynamic Multifactor ETF (OMFS): Seeks to track the investment results (before fees and expenses) of the Russell 2000® Invesco Dynamic Multifactor Index. The fund generally will invest at least 80% of its total assets in the securities that comprise the underlying index. The underlying index is designed to select equity securities from within the Russell 2000 Index, which measures the performance of 2,000 small-capitalization companies in the United States.
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