One of the most common questions about smart beta ETF strategies is how they fit into a portfolio. Investors wonder whether to evaluate such strategies as a subset of passive exposure, as systematic (rules-based) active funds, or as an entirely new approach to investing.
On the upcoming webcast (available live and on demand for CE Credit), Smart Beta—Here’s Where You Can Put It…, Robert Bush, ETF Strategist for Deutsche Asset Management, Abby Woodham, ETF Strategist for Deutsche Asset Management, George Rector, ETF Consultant for Deutsche Asset Management, and Rolf Agather, Managing Director of North America Research at FTSE Russell, will discuss the smart beta investment methodology and where investors can incorporate the strategies in a diversified investment portfolio.
For instance, investors may consider the Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS), Deutsche X-trackers Russell 2000 Comprehensive Factor ETF (NYSEArca: DESC), Deutsche X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF) and Deutsche X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG), which combine five single factors into a multi-factor strategy, including value, size, momentum, low volatility and quality.
These factors have been traditionally found in actively managed mutual fund strategies, but as index-based ETF strategies move beyond the traditional market capitalization-weighted methodology, more money managers are crafting customized passive index-based ETFs that incorporate active styles or factors.
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.
The quality factor helps hone in on the quality of a company earnings as a better gauge of future earnings performance. The underlying indices may provide a quantifiable measure of each company’s profitability, efficiency, earnings quality and leverage.