Getting Smarter About Smart Beta ETFs

Not all multifactor ETFs are created equal, and their performance can depend on economic conditions.

Reviewed by: Todd Rosenbluth
Edited by: Todd Rosenbluth

Smart-beta ETFs come in various flavors, with more risk-off dividends, low volatility and value on one end of the spectrum, and risk-on approaches such as momentum and small size on the other.

Unlike market-cap-weighted ETFs that hold stocks based on their valuation, with Apple (AAPL) and (AMZN) disproportionately driving returns, smart-beta ETFs are more narrowly constructed based on fundamental or sentiment characteristics.

Furthermore, they are, like all index-based funds, rebalanced and reconstituted based on well-defined rules throughout the year. As such, they can appear more like transparent, lower-cost versions of active mutual funds.

Value stocks have significantly underperformed since 2017, as investors have rewarded faster-growing companies like AMZN. However, Yasmin Dahya Bilger, an investment specialist on J.P. Morgan Asset Management’s Beta Strategies team, explained to CFRA the value factor currently appears cheap relative to history, and may be poised for a rebound in scenarios where corporate earnings disappoint or interest rates continue to rise.

J.P. Morgan launched its single-factor suite of products in November 2017, and CFRA already rates these ETFs based on holdings and cost analysis. Overall, JPMorgan U.S. Value Factor ETF (JVAL) holdings, including Chevron (CVX), Intel (INTC) and Johnson & Johnson (JNJ), are attractively valued based on CFRA’s analysis.

While market-cap-weighted value ETFs, such as the iShares Russell 1000 Value Index ETF (IWD), tend to be skewed to sectors like energy, financials and utilities, JVAL is built to search for relative value within a given sector. As such, technology and consumer discretionary stocks are well-represented. Year-to-date through Sept. 19, JVAL was up 4.7%.

Outlook On Momentum

Meanwhile, momentum strategies have performed much better this year, with the iShares Edge MSCI U.S.A. Momentum Factor ETF (MTUM) climbing 15%.

MTUM is attractive in CFRA’s view based on its holdings and costs. CFRA views MTUM holdings like Boeing (BA), Cisco Systems (CSCO) and JPMorgan Chase (JPM) as undervalued and incurring only moderate risk. MTUM is not sector neutral, and its holdings are currently cyclically slanted, with the weightings of the information technology (41% of assets) and consumer discretionary (20%) sectors even higher than their weightings in the Russell 1000 Growth index.

Holly Framsted, U.S. head of iShares Factor ETFs, told CFRA that in the current market environment, the iShares factor rotation model remains strongly bullish on momentum (MTUM) given its robust relative strength in the market and the strong dispersion within the factor.

While JVAL and MTUM focus on a single factor, many asset managers including iShares and J.P. Morgan offer multifactor ETFs that combine factors such as value and momentum with quality, size and /or low volatility metrics.

Strategies like the iShares Edge MSCI U.S.A. Multifactor ETF (LRGF), the John Hancock Multifactor LargeCap ETF (JHML), the JPMorgan Diversified Return U.S. Equity ETF (JPUS) and the Xtrackers Russell 1000 Comprehensive Factor ETF (DEUS) tend to have a swirl of growth and value. But we find them more akin to an active large-cap core mutual fund than the well-diversified S&P 500 Index.

Dynamic Fund

However, the Oppenheimer Russell 1000 Dynamic Multifactor ETF (OMFL) not only reconstitutes based on what stocks meet the factor criteria, the ETF adjusts the factors based on a combination of leading economic indicators and a gauge of global risk sentiment.

Dave Mazza, head of ETF Investment Strategy at OppenheimerFunds, told CFRA that leading economic indicators have recently come in above trend, while global risk appetite has waned significantly. To Oppenheimer, this indicates an environment of slowdown, which historically calls for a tilt toward equities that exhibit both lower-volatility and higher-quality characteristics.

From a risk perspective, CFRA views OMFL holdings Home Depot (HD), MasterCard (MA) and Procter & Gamble (PG) favorably. However, in the first quarter of 2018, OMFL was positioned toward value, size and momentum factors. OMFL was up 11% year-to-date

CFRA is hosting a Smart-Beta ETF educational webinar on Sept. 26 at 11a.m. ET with industry experts from iShares, J.P. Morgan and OppenheimerFunds. To register, visit or contact [email protected].

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him on Twitter @ToddCFRA.

Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence’s equity and fund business in October 2016. Follow him at @ToddCFRA.