Multi-factor ETFs are increasingly popular in the smart beta universe, but as this group expands, it is important for advisers and investors to note many of these funds feature different objectives and strategies.

The Global X Adaptive U.S. Factor ETF (NYSEARCA: AUSF), which debuted last August, tracks the Adaptive Wealth Strategies U.S. Factor Index and focuses on three investment factors: minimum volatility, value, and momentum.

“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,” according to Global X. “Dynamically allocating across multiple factors within one ETF can result in tax efficiencies compared to buying and selling individual factor ETFs.”

As of the end of 2018, AUSF held 183 stocks.

AUSF ETF Advantages

During the fourth-quarter swoon experienced by U.S. equities, AUSF’s underlying index was 400 basis points less bad than the S&P 500.

“The two main drivers were the index’s exposure to the minimum volatility factor and avoidance of the momentum factor,” said Patrick Bobbins, Investment Manager at Adaptive Wealth Strategies, in a Global X note. “When there is a risk-off event, such as what we saw in the fourth quarter of 2018 (Q4), having exposure to the minimum volatility factor can serve as a ballast to the portfolio.  This is what took place in Q4, as many of the larger S&P 500 index constituents sold off, but minimum volatility stocks, such as those in utilities and consumer staples, fared relatively better.”

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At the end of last year, AUSF allocated over 32% of its weight to financial services stocks while the real estate and industrial sectors combined for almost 22% of the fund’s weight. Currently, AUSF’s index tilts toward the minimum volatility and value factors.

“The best performing factor, will not always be the best performing factor indefinitely and the same goes for the worst performing factor – it will not always be the worst performing factor indefinitely,” said Bobbins. “So the investment process behind the index is to own two factors that have trailed on a two-year basis, and avoid the factor that has been the leader on a two-year basis.  This not only helps to keep the index diversified, but also it helps to limit some behavioral trends that are common among investors, such as chasing recent high-fliers or holding onto winners for too long.”

AUSF is off to a strong start as highlighted by its $124.36 million in assets under management. The fund charges 0.27% per year.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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