“Since it is impossible to identify which factor will perform well based on where we are in the business cycle, hiring a manager that has exposure to multiple factors will help reduce volatility and provide more consistent return stream for the client. Put another way, we hope to help improve our odds with multifactor ETFs,” Schneider added.
To help investors gain exposure to the mid-cap category, the John Hancock Multifactor Mid Cap ETF (NYSEArca: JHMM), which tracks a factor-based index developed by Dimensional Fund Advisors, follows a rules-based selection process that is seen as a multi-factor approach, combining a number of factors in a single portfolio to help investors gained improved risk-adjusted exposure to the mid-cap market segment.
The smart beta ETF’s underlying index adjusts security weights by relative price and profitability. The underlying index may overweight stocks with lower relative prices and underweight names with higher relative prices. The index can also adjust for profitability by overweighting stocks with higher profitability and underweighting those with lower profitability.
“Passively managed ETF seeks to improve on cap-weighted strategies by tracking a custom index that combines active management insight with the discipline of a rules-based approach,” Michelle Fuller, Head of ETF Distribution for John Hancock Investments, said.
Fuller also explained that while investors may find these types of factor styles in actively managed funds, most active managers have historically underperformed their respective benchmarks, especially the mid-cap category.
“Mid blend has historically been one of the more difficult benchmarks to beat,” Fuller said. “When you look at rolling 10 year returns over the past 20 years, mid blend has had the lowest percent of funds outperforming the category benchmark at 25%.”
Financial advisors who are interested in learning more about the middle capitalization category can watch the webcast here on demand.