The exchange traded fund industry has experienced accelerating growth in recent years, with the quickly developing smart beta segment attracting significant attention.
On the recent webcast (available on demand for CE Credit), 2018 Market View Through a Smart Beta Lens, Senior Investment Strategist Brian Levitt, pointed out that smart beta or factor investing in aggregate has experienced significant growth. These strategies follow themes like alternative or fundamentally weighted indexing that take the traditional principles of indexing and combine them with the diversification of weighting them differently than market cap.
For example, an investor may find smart beta indices that weight things by earnings or revenue, such as those found in OppenheimerFund’s suite of revenue-weighted ETFs, including Oppenheimer Large Cap Revenue ETF (NYSEArca: RWL), among others.
“Maybe, as an investor, I want to take more control over the outcome I have, or maybe align my expectations to something that’s more valuable to me. Maybe in the case of a fundamentally weighted strategy, I want to align toward company revenues, because that’s something that I can actually believe in and have a better appreciation that I’m actually going to get an outcome that over the long run may be improved. On the other hand, maybe an investor who really wants to build portfolios, and take further control of it, a do-it-yourselfer, I can use single factor strategies to meet that outcome,” OppenheimerFunds’ Head of ETF Investment Strategy, David Mazza, said.
Additionally, there are specific factor-based, smart beta strategies that come in various flavors. Single factor products offer precise exposure to well-established and time-tested investment styles including value, momentum, quality, size, yield and low volatility.
Something like the Oppenheimer Russell 1000 Value Factor ETF (OVLU) plays on the theme of stocks that appear cheap tend to perform better than stocks that appear expensive.
The Oppenheimer Russell 1000 Size Factor ETF (OSIZ) focuses on the size factor, which refers to smaller companies outperforming larger company stocks and is screened by full market capitalization.
The Oppenheimer Russell 1000 Momentum Factor ETF (OMOM) follows the idea that stocks which rise or fall in price tend to continue rising or falling in price.
The Oppenheimer Russell 1000 Quality Factor ETF (OQAL) bets on higher quality companies in the hopes that they perform better than lower-quality companies.
The Oppenheimer Russell 1000 Low Volatility Factor ETF (OVOL) follows the theme where stocks that exhibit lower volatility tend to perform better than stocks with higher volatility.
Lastly, the Oppenheimer Russell 1000 Yield Factor ETF (OYLD) tracks the idea that higher-yielding stocks tend to perform better than stocks with lower yields.
“Many of these are well-known principles or fundamentals that investors can understand. And then lastly, there’s this multifactor category, and these are where single factor strategies are combined together. So, just two or more single factors can create a multifactor type outcome,” Levitt said.
For example, the Oppenheimer Russell 1000 Dynamic Multifactor ETF (Cboe: OMFL) and Oppenheimer Russell 2000 Dynamic Multifactor ETF (Cboe: OMFS) select companies through exposure to a subset of the low volatility, momentum, quality, size and value factors.
These types of factor-based investments help investors steer away from the potential risks associated with a traditional market-cap weighted fund that can grow top heavy, especially in a prolonged bullish environment.
“When you weight based on price, you just keep increasing your weighting as the price goes up. If you weight based on something fundamental, you participate through the quarter, and then take it back to its fundamental weight in the portfolio,” Levitt said.
“We can systematically be contrarian, focus on fundamentals above focusing just on price,” Mazza added.
Financial advisors who are interested in learning more about Smart Beta strategies can watch the webcast here on demand.