Top Performing Multifactor ETFs

Multifactor ETFs are growing in popularity with ETF users who look to these strategies for factor diversification and outperformance relative to the broad market. Combing through these strategies, however, is no small task.

Multifactor ETFs come in all shapes and sizes, and today, there are some 228 multifactor ETFs in the market.

Perhaps the biggest challenge could be one of definition. To many, a multifactor ETF is one that combines various risk factors known to deliver premiums over time—think mixing value, size, momentum, low volatility, high yield and quality in one portfolio.

Single Factor With Multifactor Methodology

But multifactor ETFs can also be funds that look like single-factor ETFs—such as the Vanguard Russell 2000 Value Index Fund (VTWV)—but employ a multifactor methodology to stock selection and/or weighting. Under that broader definition, VTWV is a multifactor ETF and one of the best performing in the past year, with some 45% in total returns.

Using the broadest-possible brush to find the best-performing multifactor ETFs—including those that mix risk factors as well as those single-factor funds that employ multifactor methodologies, we have found that the best-performing multifactor ETFs in the past year have come from one of two providers: PowerShares and First Trust.

PowerShares, with 129 ETFs in the market with combined assets nearing $110 billion, is well-known for its smart-beta strategies. So is First Trust, with 114 ETFs in the market and nearly $45 billion in assets.

Here’s a quick look at the top-performing multifactor funds in the past 12 months:

PowerShares Dynamic Semiconductors Portfolio (PSI) – up 72%

PSI is a U.S. equity fund that uses a quantitative model to select and weight semiconductor companies. Securities are picked through a multifactor methodology that looks at price momentum, earnings momentum, quality, management action and value, according to the company. The index-based strategy is a smart-beta approach to the semiconductor space.

In the past 12 months, PSI has led multifactor ETFs, delivering more than 72% in total returns—and outpacing the S&P 500 by some 50 percentage points, as the chart below shows.

PSI has only $156 million in assets despite its being on the market for roughly 12 years. From a cost perspective, this ETF has an expense ratio of 0.63%, which isn’t all that unusual in the smart-beta space. Still, PSI trades with an average spread of 0.30%, according to our data, putting the overall cost to own and trade this fund around 0.93%, or $93 per $10,000 invested.

First Trust RBA American Industrial Renaissance ETF (AIRR) – up 63%

AIRR is a U.S. equity fund that tracks a multifactor-selected and proprietary-weighted index of industrial companies that tap into the expertise of well-known active manager Richard Bernstein Advisors.

The portfolio, tilted toward small- and midcap names, looks for service and support firms, as well as community banks that would benefit from any sort of industrial “revival,” according to our data.

The index underlying the strategy, the Richard Bernstein Advisors American Industrial Renaissance Index, excludes companies that do 25% or more of their sales outside the U.S., and it also looks at 12-month forward earnings estimates as a selection screen, according to First Trust. Individual securities can weight no more than 4% of the mix at rebalance.

Launched in 2014, AIRR has $188 million in assets. The fund carries a 0.70% expense ratio, and trades with an average spread of 0.20%, so total cost of ownership and trade of this ETF is about $90 per $10,000 invested.

PowerShares Russell 2000 Pure Value Portfolio (PXSV) – up 47%

PXSV is a U.S. small-cap equity value fund that selects and weights securities through a multifactor approach that looks at price to book, historical sales growth and growth forecast metrics. This ETF “remains one of the few ‘pure’ value funds in the small-cap space,” according to our data.

Launched in 2005, PXSV has $92 million in assets. The fund has an expense ratio of 0.39%, and with an average trading spread of 0.25%, its total cost of ownership is $64 per $10,000 invested.

First Trust Materials AlphaDEX Fund (FXZ) – up 47%

FXZ is one of First Trust’s several AlphaDex ETFs. AlphaDex is a quantitative approach designed to beat the broad market through what some call active indexing. In essence, AlphaDex ETFs divide stocks by growth, core and value, and then assign them scores based on various metrics.

In the case of FXZ, the methodology picks stocks from the Russell 1000 using several growth and value factors. FXZ looks at three-, six- and 12-month price appreciation, sales-to-price and one-year sales growth as its growth metrics, and book-value-to-price, cash-flow-to-price and return-on-assets as its value metrics.

The index then looks at the growth and value scores following this selection process, and selects the top 75% names in the materials sectors based on these scores, according to First Trust. The resulting portfolio often tilts toward smaller-cap names, and can show segment concentration at times, our data show.

Launched in 2007, FXZ has $344 million in assets. The fund’s expense ratio is 0.66%, and trades with an average spread of 0.05%, meaning investors are shelling out about 0.71% to own and trade this ETF, or $71 per $10,000 invested.

Charts courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected]