Strategic beta or smart beta exchange traded funds that seek the premium of a single factor have gained in popularity, but they may complicate investors’ pursuit of alpha, diversification, and portfolio stability.
On the upcoming webcast (available for CE Credit), Just the Facts on Single Versus Multifactor ETFs, Michael Stephens, Portfolio Consultant at John Hancock Investments, and Wes Crill, Vice President, Research Group at Dimensional Fund Advisors, will discuss how mixing a variety of single-factor approaches can produce unintended consequences, such as exposure overlaps, higher costs, and style drift, raising risks in investors’ portfolios.
Alternatively, ETFs that combine multiple factors can help smooth out the ride and still help investors capture any upside potential. For instance, John Hancock offers broad smart-beta ETFs to fill out a core portfolio position, including the John Hancock Multifactor Large Cap ETF (NYSEArca: JHML) and John Hancock Multifactor Mid Cap ETF (NYSEArca: JHMM), along with a suite of multifactor sector-specific ETF strategies for investors seeking to overweight targeted areas of the market.
The John Hancock Multifactor ETFs track indices developed by Dimensional Fund Advisors, which act as the subadvisor to the funds.
The smart-beta ETFs follow a rules-based selection process that is seen as a multi-factor approach, combining a number of factors in a single portfolio. Securities are adjusted by relative price and profitability. The underlying indices may overweight stocks with lower relative prices and underweight names with higher relative prices. The indices can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability.
The underlying indices also implement market-capitalization adjustments where they increase the weights of smaller companies within the eligible universe and decrease the weights of larger names. The weighting methodology help the ETFs follow a more equal-weight tilt with greater exposure to smaller companies than traditional market-cap weighted index funds in an attempt to capture the size premium and limit risks associated with high-flying, large-cap stocks that may be overbought in an ongoing bull market rally.
Related: Smart Beta ETF Factors That Have Been Standing Out
JHML’s top sector weights include information technology 19.9%, financials 14.5% and consumer discretionary 13.0%. Top holdings include Apple (NasdaqGS: AAPL) 2.8%, Microsoft (NasdaqGS: MSFT) 1.5% and Alphabet (NasdaqGS: GOOGL) 1.2%.
JHMM’s top sector weights include information technology 17.7%, financials 15.5% and industrials 15.4%. Top components include Western Digital (NasdaqGS: WDC) 0.5%, Lam Research Corp (NasdaqGS: LRCX) 0.5% and CR Bard Inc (NYSE: BCR) 0.4%.
Financial advisors who are interested in learning more about factor-based, smart beta ETF strategies can register for the Tuesday, August 15 webcast here.