Multi-factor ETFs, or smart beta strategies that screen for various market factors, have helped investors enhanced returns over time with diminished downside risks.
“Indexes that blend market factors in an intelligent and systematic way may be an effective tool for long-term investors,” according to FTSE Russell.
Specifically, the index provider looked at the Russell 1000 2Qual/Val 5% Capped Index, the underlying index for the recently launched Xtrackers Russell 1000 US QARP ETF (NYSEArca: QARP), and compared it to the widely observed US large-cap Russell 1000 Index.
FTSE Russell found that the Russell 1000 2Qual/Val 5% Capped Index, which uses a multi-factor methodology to screen for US large cap companies that exhibit strong quality and value characteristics relative to the Russell 1000 Index, was slightly lower in the first quarter. However, the multi-factor indexing methodology outperformed the Russell 1000 for the 6-month, 1, 3, 5 and 10 year periods as of March 31.
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QARP’s underlying index has achieved its strong relative performance in part by capturing 96% of the upward performance of the Russell 1000 and only suffered through 85% of the downward performance of the Russell 1000. Essentially, the smart beta indexing methodology helped investors ride the up trends while limiting the downside to improve overall risk-adjusted returns.