Within the smart or strategic beta space, multi-factor ETFs are seen as a new avenue for growth with data suggesting advisors and investors are embracing funds that provide access to multiple investment factors.
“Multi-factor ETFs are marketed as a way of improving investor return profile by addressing the risks inherent to single-factor smart beta funds,” according to Morningstar research. “We are seeing an evolution in product development on this front. The first batch of multi-factor ETFs tended to follow an equal-weighted approach to combining several factors.”
With the various factors out there, which can define equities across across various parameters, individual stocks can exhibit multiple features. Consequently, investors may have the best of both worlds, gaining exposure to two or more factors for the price of one investment.
Deutsche Asset Management offers a Comprehensive Factor ETF suite, including Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS), 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).
The Duetsche X-trackers multi-factor suite selects components based on a broader five factors, including quality, value, momentum, low volatility and size.
“One of the most important reasons behind the multi-factor ETF boom is also one of the easiest to explain. Historical data indicate that, from year-to-year, different individual investment factors shine while others lag. While the value is often a winner over the long-term, value stocks are being trounced this year by growth and momentum equivalents,” according to Investopedia.
DEUS makes accessible to investors a multi-factor strategy previously seen in the world of active management with cost advantages and efficiency of the ETF wrapper. DEUS selects components based on a broad set of five factors, including quality, value, momentum, low volatility and size.
The ETF follows the Russell 1000 Comprehensive Factor Index and holds 835 stocks. Factor investing combines low-cost, systematic approach found in passive investments with research driven benchmark outperformance found in actively managed portfolios and cutting edge alpha capture in alternative strategies.
Related: Smart Beta Investing: Right Time to Confirm Quality
Traders have often used single factor ETFs to tactically increase or decrease exposure to a desired factor or rotate out a factor exposure in a changing market environment. But there are risks with single factor strategies.
Quality is now the most expensive of all four valuation multiples while value is the least expensive. Potential investors, though, should keep in mind that value has the second lowest expected earnings-per-share growth rate among the major factors, the highest debt-to-equity ratio and lowest return on equity. Meanwhile, momentum has the highest expected earnings growth.
DEUS is up 14% year-to-date.
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