Sources: FTSE/Russell, MSCI, Morningstar Direct, and CLS Investments. Performance versus MSCI All Country World Index for Russell 3000 Index and MSCI Indexes. Multi-asset, multi-sector, and multi-factor portfolios are equal-weighted mixes of asset class, sector, and factor index components. As of June 30, 2017.
#3. Factors can deliver superior risk-adjusted returns over time.
Nothing is rewarded in life without some amount of risk. This is especially true when it comes to investing. As investors think about their choices, choosing an approach that helps portfolios grow without taking on too much risk can be the difference between long-term success and failure.
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Not only can factors deliver meaningful positive excess returns over time, much of the excess returns are still there after adjusting for the inherent risk. We find equal-weighted mixes of factors historically have delivered more superior risk-adjusted excess returns over time by a whopping 2.2% over the market. This pales in comparison to just 0.7% of risk-adjusted excess return for an equal-weighted mix of sectors and -0.7% risk-adjusted excess return for an equal-weighted mix of asset classes.
Sources: FTSE/Russell, MSCI, Morningstar Direct, and CLS Investments. Performance versus MSCI All Country World Index. Multi-asset, multi-sector, and multi-factor portfolios are equal-weighted mixes of asset class, sector, and factor index components. As of June 30, 2017.
Bottom line: Advisors should consider the benefits of adopting factor-based ETFs.
As advisors evaluate new opportunities to deliver long-term diversification and returns in client portfolios, the analysis above highlights tangible support for the use of factor investing in portfolios. We believe factors help get to the heart of the ongoing challenge of maintaining a strategic edge over markets in the long run. What’s even better is factor investing provides an edge with unique risk mitigation considerations not available through traditional asset class or sector-based investment approaches. If advisors have not taken a deeper look at factor-based ETFs, the evidence is too compelling now not to do so.
Joe Smith, CFA, is a Senior Market Strategist at CLS Investments, a participant in the ETF Strategist Channel.
Disclosure Information
This information is prepared for general information only. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. The graphs and charts contained in this work are for informational purposes only. No graph or chart should be regarded as a guide to investing. 2734-CLS-7/13/2017