A Thriving Domestic Multi-Factor ETF

Smart beta is one of the fastest-growing segments in the ETFs universe and within that realm, multi-factor ETFs are increasingly popular.

Over the past few years, money managers and fund sponsors started to roll out rules-based, transparent index ETFs that combined some of the attributes that have historically provided active managers with outperformance, such as prominent investment factors like quality, momentum, value, low volatility and size.

The iShares FactorSelect MSCI USA ETF (NYSEArca: LRGF) is an example of a successful, thriving domestic multi-factor ETF.

iShares’ FactorSelect ETFs also track smart-beta indices that select components based off four factors, including quality, momentum, value and size. LRGF is part of a five ETF suite of factor select ETFs from iShares, the world’s largest ETF issuer.

Inside LRGF

LRGF, which turns three years old later this month, holds nearly 150 stocks. The ETF, which tracks the MSCI USA Diversified Multiple-Factor Index, devotes nearly 23% of its weight to technology stocks and almost 27% of its combined weight to healthcare and industrial names.

“The sector tilts in the portfolio are primarily driven by momentum and small size, since the fund measures each stock’s value and quality characteristics relative to its sector peers,” said Morningstar in a recent note. “These sector-relative comparisons improve comparability and reduce persistent sector bets, which could be a source of active risk not directly related to the targeted factors.”

Related: Factor Crowding, Timing & Future of Factor Investing