Multifactor ETFs Poised To Grow In 2017

January 04, 2017

While 2015 was the proliferation year for ETFs combining multiple factors such as quality, value and low volatility, CFRA thinks 2017 could be the year when advisor and investor adoption takes off, based in part on 2016’s performance.

However, understanding what’s inside the ETFs offered by such established providers as BlackRock’s iShares and SSGA and newer entrants such as Goldman Sachs, J.P. Morgan and others are important when comparing their record.

Two years ago, the asset management industry seemingly came to an agreement. Investors would soon be ready for a rules-based, transparent approach that combined some of the attributes that historically provided active managers with outperformance. These five attributes, or factors, were quality, momentum, value, low volatility and size.

Active equity mutual funds continued to shed more assets last year—$100 billion in the first 11 months of 2016—than the combined outflows in the previous three years, according to Morningstar. CFRA thinks asset managers were correct to have established products for those seeking lower-cost alternatives.

Different Approaches To Outperformance

Some asset managers partnered with index providers FTSE Russell and MSCI, while others created their own indexes or partnered with another asset manager. Combined, the six U.S.-focused ETFs highlighted below have approximately $2.2 billion in assets.

They all took a different approach with the factor selection and implementation, which has resulted in unique portfolios. In four of the six examples, the ETF outperformed the 11.97% gain for the S&P 500 Index.

The iShares Edge MSCI Multifactor ETF (LRGF) and the SPDR MSCI USA StrategicFactors ETF (QUS) both launched in April 2015 and leverage MSCI’s factor efforts. They each incorporate quality and value. To this, QUS adds in low volatility in an equally weighted manner, while LRGF incorporates momentum and size, and attempts to maximize factor exposure with an optimizer.

Factors Used In Multifactor ETFs

  Quality Value Momentum Size Volatility
DEUS x x x x x
GSLC x x x   x
JHML x x   x  
JPUS x x x    
LRGF x x x x  
QUS x x     x

 

 

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