Mutli-factor ETFs are driving growth in the smart beta arena. One of the solid choices among domestic multi-factor funds is the Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS), which launched over two years ago.
The ETF “seeks investment results that correspond generally to the performance, before fees and expenses, of the Russell 1000 Comprehensive Factor Index. The index is designed to provide exposure to domestic equities based on five factors – Quality, Value, Momentum, Low Volatility and Size,” according to DWS.
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.
“Rather than using composite factor scores to select stocks, this fund starts with the Russell 1000 Index portfolio and adjusts each stock’s weighting based on its value, quality, momentum, (low) volatility, and (small) size characteristics,” said Morningstar in a recent note.
For buy-and-hold investors, multi-factor investments help combine uncorrelated investment styles to smooth out volatility. Since there are multiple uncorrelated factors at play, it helps guarantee that at least one factor will help support the portfolio during times of distress. Moreover, a multi-factor ETF removes the need for investors to babysit a portfolio and switch between factors in an attempt to time market moves.
“DEUS does not make any sector-relative adjustments in its assessment of value and quality. However, it does constrain its sector tilts relative to the Russell 1000 Index,” according to Morningstar.