Which Factor Works Best in the Current Market Environment?

Investors who are getting their toes wet with factor investing have a litany of options when it comes to choosing which fund suits their portfolios best. One way to approach the current market environment is to take a one-size-fits-all approach with funds like the Xtrackers FTSE Developed ex US Comprehensive Factor ETF (NYSEArca: DEEF).

It’s a smorgasbord option for investors who have become more privy to factor-based strategies.

“The factor approach has become popular, because indices constructed using factors such as value, size, volatility, quality or momentum have all outperformed traditional equity indices over the long term,” said Michel Perera, chief investment officer of Canaccord Genuity Wealth Management, in a FT Adviser article. “The underperformance of value as a style is as pronounced as it has ever been. It could be that 2020 is a year where value leads the way, but committing too much to it may be foolhardy.”

It’s a trend that should continue to persist in 2020 and beyond.

“I expect more clients to start considering factors, including ones that don’t have an active allocation,” said Antonio Picca, head of factor-based strategies at Pennsylvania-based Vanguard Quantitative Equity Group, in an Advisor’s Edge article. “Our 10-year economic outlook for U.S. equities is in the mid-single digits. Factors come up in a lot of conversations with advisors who are looking for clients to achieve, say, a 4% spending objective in this low-return environment.”

DEEF seeks investment results that correspond generally to the performance of the FTSE Developed ex US Comprehensive Factor Index. The index is designed to track the equity market performance of companies in developed countries selected on the investment style criteria of value, momentum, quality, low volatility and size.

As investors look into these factor-based funds or any funds for that matter, cost will always be big determinant when it comes to how they allocate their capital. In this case, DEEF’s 0.24% expense ratio is lower than its category average of 0.37% based on Yahoo Finance profile data.

ESG Turning into a Factor?

Environmental, social and governance (ESG) has become a force in the investment arena as it continues to experience exponential growth, but can it become a factor? In the realm of smart beta investing, ESG could join value, growth, momentum, and other factors sometime in the future.

An article in Funds Europe posed an interesting question: “Nearly half of institutional investors had some form of ‘smart beta’ allocation last year and, separately, research also showed that ESG growth among the world’s largest asset managers was soaring. But could the two – smart beta and environmental, social and governance investing – be combined as a type of investment factor?”

“There is a very strong appetite for ESG combined to smart beta in funds,” said Bruno Taillardat, head of smart beta and factor investing at Amundi. “Smart beta funds rely on well-structured and disciplined investment processes.”

For more market trends, visit ETF Trends.