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.”