How To Compare Single Factor ETFs

May 22, 2018

[This article appears in our June 2018 issue of ETF Report.]

Factor ETFs have grown in popularity, whether single factor or multifactor. While multifactor funds say they can smooth out the ride, sometimes it’s hard to tell which factor may be contributing (or detracting) from performance.

Looking at some of the best-performing single-factor ETFs for 2017 shows how the factor can sometimes help increase excess returns in markets that are already strong. Several of these funds are non-U.S., which isn’t a complete surprise, since ex-U.S. funds outperformed the broader domestic funds.

Sean Clark, chief investment officer at Clark Capital Management Group, prefers using single-factor ETFs to complement existing holdings over multifactor ETFs.

“What we like about blending the market-cap-weighted ETFs and also the single-factor-based ETFs into our process is we get very unique exposures in the portfolio,” he said. “When a factor is being rewarded in the marketplace and our [investment model] steers us in that direction, we want to be pure to that factor.”




The dividend category for factor funds is vast, with 149 funds listed, although some dividend funds are in fixed income, too. The WisdomTree Japan SmallCap Dividend Fund (DFJ), up 22.3% in 2017, eked out a slightly better performance than its currency-hedged counterpart, the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS) did, at 22.2%.



Joe Tenaglia, asset allocation strategist at WisdomTree, said Japanese ETFs are benefiting from the sustained growth in the Japanese economy for the first time in a while. Japan has seen eight-straight quarters of gross domestic product growth for the first time since the late 1980s as well as expansion in the purchasing manager indexes. “What's changed, though, is the fact that this economic growth is being driven by domestic demand and consumption,” he said.

Most Japanese companies pay a dividend, so to differentiate from the index with DFJ, Tenaglia says they remove the 300 largest dividend-paying stocks, and then weigh them by their dividends, which still leaves over 900 stocks.

“The really big differentiator is the dividend-weighted approach, where we sum all the cash dividends paid out, and then each company gets weighted by their contribution to that total, instead of being weighed by their market cap,” he explained.

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