Single Factor ETFs Can Be Multifactor

June 28, 2017

[This article appears in our August 2017 issue of ETF Report.]

Currently ranked seventh in ETF assets under management in the U.S., with $43.8 billion invested in 89 funds, WisdomTree was one of the first ETF issuers to build its business on smart-beta ETFs. Recently, chatted with Luciano Siracusano, the firm’s chief investment officer, about how WisdomTree’s ETFs fit right in with the ETF industry’s booming multifactor trend. In your opinion, is smart beta about risk reduction or performance enhancement?

Luciano Siracusano: It can be about both. But I think the broader application going forward is viewing smart beta as a potential source of excess return, above and beyond beta. And I feel that’s the big application going forward, particularly if investors move away from mutual funds as their vehicle for trying to generate market-beating performance. That’s really where smart beta has a big opportunity going forward. WisdomTree has always been about earnings- and dividend-focused equity funds. Is WisdomTree looking at anything beyond earnings and dividends for future funds?

Siracusano: I'm not going to comment on future funds now. But I think there's a much greater understanding now about how you actually get exposure to factors like value or quality or profitability over time.

What's interesting is that when people test many different ways to get these exposures, there's something really unique about using dividends or earnings in that they give you exposure to more than one of these factors at the same time.

So rather than think about how a dividend-weighted exposure is giving you exposure to one factor—meaning dividends—what it’s really doing is giving you a way to tap into the value premium, as well as the quality premium. And if you're doing it in a small or midcap space, you also tap into size.

Investors are starting to realize there are ultimately four main smart-beta factors you want to tap into, and earning-weighted and dividend-weighted strategies will typically tap into three of them pretty efficiently: value, quality and size.

The benefit of dividend-weighted is sometimes it also brings down the volatility of the portfolio. That can help them offset some of the hotter volatility you’d typically take on having value or size exposure.


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