As the ETF universe matures, a number of smart beta or factor based ETFs have hit the market, and the strategies are quickly garnering many investors’ attention.
“It is an evolution, and it is an education process that goes along with that,” Luke Oliver, Managing Director and Head of Capital Markets for DWS, said at the 2018 Morningstar Investment Conference.
Like any other investment strategy, smart beta ETFs come with their own quirks that investors should fully understand to better utilize the investment products in an efficient manner.
For example, DWS offers a Comprehensive Factor ETF suite, including X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS), X-trackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF), X-trackers Russell 2000 Comprehensive Factor ETF (NYSEArca: DESC) and X-trackers FTSE Emerging Comprehensive Factor ETF (NYSEArca: DEMG). The X-trackers multi-factor suite selects components based on a broader five factors, including quality, value, momentum, low volatility and size.
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.
“These are the five factors that we think are very compelling both pro-cyclical and counter-cyclical. And if we combine those in the right way, we provide a portfolio that is an all-weather portfolio,” Oliver added.