One-Factor-Fits-All Approach Won't Work in Today's Market

As more education and awareness in smart beta investing grows, factor investing, in particular, is seeing a rise in investor interest. Value, quality, minimum volatility and momentum are options, but in the current market, it’s best to stick with a multi-factor approach.

“What we are saying with investors is don’t put all your eggs in one factor,” said Jay Jacobs, head of research and strategy at Global X ETFs. “These can underperform individually. They have low correlation to each other. Get diversified, multi-factor exposure.”

“There’s plenty of data out there that goes back 40 years looking at these factors and how they’ve expressed themselves, but they can still do long periods of underperformance,” Jacobs added. “It shakes out the fast money that doesn’t believe in value or doesn’t believe in momentum, and that’s ultimately what drives return in the long run.”

As it currently stands, growth has been on an absolute tear since the financial crisis over 10 years ago. That doesn’t mean investors should count value out, especially if the bull market is running out of steam.

“Since late 2008, early 2009, we’ve been in a growth environment, and that has sort of weighed on value,” said Ed Rosenberg, senior vice president and head of exchange-traded funds at American Century.. “Without any of that volatility, which is what value’s looking for to outperform over time, it looks like it’s always going to underperform. But there will be a cycle that we’re getting to, especially for the end of this bull run, where value’s going to come into play and having some in the portfolio is going to be important.”

A Multi- and Single-Factor ETF Option

Investors looking to get that multi-factor exposure via the convenience of one ETF can look at the Invesco Russell 1000 Dynamic Multifactor ETF (BATS: OMFL). With a 0.29% expense ratio, OMFL offers a cost-effective solution as well as a trailing return of 22% within the past year, according to Morningstar performance numbers.
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.
If investors insist on getting exposure to a single factor, it’s best to stick with quality. As such, one ETF option to consider is the cost-effective iShares Edge MSCI USA Quality Factor ETF (BATS: QUAL)with a paltry expense ratio of just 0.15%.
QUAL seeks to track the investment results of the MSCI USA Sector Neutral Quality Index composed of U.S. large- and mid-capitalization stocks with quality characteristics as identified through certain fundamental metrics.
“For 2020, we do like quality,” said Armando Senra, who runs iShares Americas for BlackRock’s trillion-dollar ETF suite. “We look at stable earnings. We look at low financial leverage.”
For more market trends, visit ETF Trends.