Smart Beta ETFs to Enhance Returns in a Challenging Environment

As investors try to navigate an extended bull market environment, many should consider smart beta exchange traded fund strategies to potentially improve portfolio diversification and enhance returns.

“We believe investing through a lens of equity style factors –broad, persistent characteristics driving returns –can potentially help investors increase diversification and enhance returns relative to broad market exposure,” Kate Moore, Chief Equity Strategist at BlackRock Investment Institute, and Andrew Ang, Head of BlackRock’s Factor-based Strategies Group, said in a research note.

The two strategists argued that investors should focus on a diversified multifactor portfolio.

“We advocate ’tilting’, or adjusting exposure to various factors in a diversified multifactor portfolio. We believe economic regime is the biggest driver of equity style factor performance, although combining this with other indicators such as relative strength, valuation and dispersion can potentially produce better results,” the BlackRock strategists said.

For example, investors can use the iShares FactorSelect MSCI USA ETF (NYSEArca: LRGF), which tracks the MSCI USA Diversified Multi-Factor Index, to track U.S. markets, or the iShares FactorSelect MSCI International ETF (NYSEArca: INTF), which tracks the MSCI World ex USA Diversified Multiple-Factor Index, for overseas exposure.