A Factor Trifecta: The ETF to Beat Market Cap-Weighted Indexes

Two factors are better than one, but three factors–now that’s a crowd big enough to beat market cap weighted indexes. The trifecta of minimum volatility, value, and momentum comprise the Global X Adaptive U.S. Factor ETF (AUSF).

AUSF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Adaptive Wealth Strategies U.S. Factor Index (the “index”). The fund invests at least 80% of its total assets that comprise the securities of the index.

Its 80% investment policy is non-fundamental and requires 60 days prior written notice to shareholders before it can be changed. The index is designed to dynamically allocate across three sub-indices that provide exposure to U.S. equities that exhibit characteristics of one of three primary factors: value, momentum and low volatility.

ASUF offers investors:

  • Outperformance Potential: AUSF seeks to outperform traditional market capitalization weighted indexes by allocating across three factors that have historically demonstrated advantages compared to broad benchmark indexes.
  • Dynamic Factor Allocation: AUSF either allocates to two factors with a 50% / 50% weighting, or all three factors with a weighting of 40% / 40% / 20% depending on the trailing returns of each factor.
  • Tax Efficiency: Dynamically allocating across multiple factors within one ETF can result in tax efficiencies compared to buying and selling individual factor ETFs.

AUSF Chart

Why Would You Exclude Your Best Factor?

One of the peculiarities that make AUSF so discerning is that its strategy eliminates the best performing factor. Now that would be akin to benching your best player on a basketball team, but there’s a method to the madness:

“This hits at the heart of our philosophy: mean-reversion,” Global X noted in a blog post. “Factors are cyclical, and factor performance can become stretched. Many advisors can point to times when momentum became too far stretched to the upside after the investment herd bought in.”

“What happened next? Often, it mean-reverted after spending time at the top and came crashing back down,” the post explained. “The same can be said of value as well; its performance can become stretched before mean-reverting. Our goal is to rotate to the factors that are overly stretched on the downside and avoid the ones that are overly stretched on the upside. This provides the opportunity for the underperforming factors to appreciate and hopefully avoid the factor that is about to fall. While not foolproof, it is an intuitive strategy that attempts to follow a basic investment principal: buy low and sell high.”

All in all, moderation is always best. Best of all, the barrier to entry is fairly low: a mere 0.27% total expense ratio.

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