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Smart Beta: Multi-factor ETFs

In the fifth in our series explaining the different styles investors can add to their portfolios through strategic beta ETFs, Monika Dutt talks multi-factor investing

Monika Dutt 3 November, 2017 | 11:12AM

 

Monika Dutt: As the name indicates, multi-factor ETFs combine multiple factors, including value, low volatility, momentum, yield, and size. 

Owning any single factor on a stand-alone basis over time has the potential to deliver better risk-adjusted returns relative to the market. But factors are cyclical, each can go through long spells of underperformance. Value for example, which was a winning strategy after the dotcom crash in the early 2000’s, has underperformed for much of the past decade.

Multi-factor ETFs aim to address this issue of factor cyclicality. By combining factors, multi-factor strategies offer a smoother ride through market cycles, reducing the risk of investors abandoning sound strategies at precisely the wrong time.

With multi-factor ETFs, it’s important to understand not only how the individual factors are built, but also how they are put together, as different approaches will lead to different outcomes.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Monika Dutt  is a Passive Strategies Research Analyst for Morningstar Europe