Morningstar Brings Factor Profiles into Fund Evaluations

As more and more investors start to adopt factors as a screening mechanism when identifying potential funds to allocate their capital, firms like Morningstar are meeting the demand with the introduction of the Morningstar Factor Profile.

The factor profile will incorporate seven different factors—style, yield, momentum, quality, volatility, liquidity, and size.

“The Morningstar Factor Profile provides a snapshot of funds’ exposures to seven different factors,” wrote Ben Johnson in Morningstar. “These factors are common characteristics of stocks that can help to explain their long-term returns relative to the broader market. Each has been well-documented and vetted in academia and implemented by investment practitioners.”

“The familiar size and style factors that define the dimensions of the Morningstar Style Box bookend the set of seven featured in the Factor Profile,” Johnson noted. “In the middle are five additional factors (yield, momentum, quality, volatility, and liquidity) that provide a deeper understanding of the drivers of stock funds’ returns.”

Click here for more information on Morningstar’s Factor Profile.

Putting it All Together

Not sure where to start when it comes to factors? A multi-factor approach can work, such as an ETF like theInvesco Russell 1000 Dynamic Multifactor ETF (BATS: OMFL) shows that multi-factor investing can work in today’s market landscape.

“There has recently been some chatter about the go-go days of smart beta exchange traded funds winding down, but industry observers may want to be cautious when it comes to doubting multi-factor funds because some of those ETFs are delivering the goods in 2019,” wrote the ETF Professor in MarketWatch. “As has been noted, multi-factor ETFs as a group experienced significant population growth over the past couple of years and 2019 flows data indicate some advisors and investors are warming up to these products.”

OMFL seeks to track the investment results of the Russell 1000 Invesco Dynamic Multifactor Index. This underlying index is designed to select equity securities from within the Russell 1000® Index, which measures the performance of the 1,000 largest-capitalization companies in the United States.

“In the last five years, many asset managers have successfully launched multi-factor index-based ETFs that combine three or more investment approaches that historically showed performance success,” CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth said in a recent note. “These factors are low volatility, momentum, size, quality and value. CFRA reviewed the performance of ten of these US-focused ETFs, which do not all use the same factors, or use them the same way, and often have different criteria for security inclusion.”

For more market trends, visit ETF Trends.