Mix and Match ETFs to Profit in US Stock Market

The most compelling reason to opt for a multi-factor strategy is that it will minimise the risk of a single factor experiencing a period of underperformance

Monika Calay 8 June, 2018 | 12:10PM
Facebook Twitter LinkedIn



Monika Dutt: The first half of 2018 has been a true testament to the cyclicality of factors. For example, in the US equity space, quality and momentum outperformed, while dividend yield and minimum volatility lagged the market.

These uneven stretches of performance can make holding single-factor funds difficult to stick with sometimes. A smoother way to access the US equity market is by using multi-factor funds. So, funds that offer exposure to several factors at once.

The most compelling reason to opt for a multi-factor strategy is that it will minimise the risk of investors bailing on a factor when it experiences an inevitable period of underperformance. At Morningstar, we have a positive view of two U.S. equity multifactor ETFs, the iShares Edge MSCI USA Multifactor (IFSU) and the UBS MSCI USA Select Factor Mix (USFMD).

Although both funds have “MSCI USA” and “multifactor” in their name, their investment propositions are different.

The UBS ETF combines six-single factor MSCI USA indices into one portfolio. The fund’s approach is simple and transparent. And its performance is unlikely to stray too far away from the MSCI USA’s.

The fund’s main drawback is that it puts the factors together but doesn’t address how they work together. Because of this, the portfolio may suffer from more muted factor exposure, as some factors may wash other factors out.

The iShares ETF offers a more holistic approach. It uses an optimiser to maximise the portfolio’s exposure to four factors. This approach is likely to achieve deeper factor tilts compared to the UBS ETF.

The main concern we have with this fund is that it’s constructed in one go using an algorithm. So, it’s difficult to explain why a certain stock was chosen over another one in the final portfolio. Overall, we have a positive view of both strategies, but we remain conservative because of their short live track records.

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.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
iShares Edge MSCI USA Mltfct ETF USD Acc11.22 USD0.09Rating
UBS ETF MSCI USA Sel Fac Mix USD A dis30.52 USD-0.93Rating

About Author

Monika Calay  is Director of Passive Strategies Research for Morningstar Europe

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures