Smart beta exchange traded funds provide investors the opportunity to capitalize on a number of factor-based strategies to potentially enhance returns and limit downside risks.
The best performing factor for July has been the momentum factor, which gained 3.5%, while the worst factor was minimum volatility, which rose 1.9%, according to MSCI.
Year-to-date as of the end of July, the best performing fact has been momentum, which increased 20.8%, while the worst was minimum volatility, which gained 11.9%.
The iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM), which tracks large- and mid-cap U.S. stocks with relatively high price momentum, was up 22.3% so far this year. Meanwhile, the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV), which selects stocks based on variances and correlations, along with other risk factors, was up 10.6%.
“Simple momentum strategies have historically worked (on paper) in nearly every market studied. A compelling explanation is that investors may anchor their investment thesis to old information and react slowly to new information, causing prices to adjust more slowly than they should,” Morningstar analyst Alex Bryan said in a note.
The most expensive factor on a forward price-to-earnings basis was the minimum volatility USD at 19.0. On the other hand, the cheapest factor was enhanced value with a forward P/E of 16.1.
USMV currently shows a 22.9 P/E and a 3.29 price-to-book, according to Morningstar data. Meanwhile, the iShares MSCI USA Value Factor ETF (NYSEArca: VLUE), which targets large- and mid-cap U.S. stocks with lower valuations based on fundamentals, has a 13.85 P/E and a 1.73 P/B.
“The fund should benefit more than most of its peers when value stocks outperform because it has a more exaggerated value tilt. And it is less dependent on the performance of traditional value sectors, like financial services, utilities, and energy,” Bryan said in a research on VLUE.
In contrast, MTUM trades at a 19.67 P/E and a 2.79 P/B while the S&P 500 Index shows a 19.94 P/E and a 2.82 P/B.
For those interested in a cheap pick, VLUE and the enhanced value factor were trading at the lowest relative valuations, and the enhanced value factor has historically exhibited an average relative valuation versus its peers.
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