What is multifactor etf investing – is it worth a try_

Thus far, I’ve stuck with the market cap indexing and dipped into small cap and value indexes to capitalize on their historical outperformance. Msci value index methodology But, I’m curious to find out whether the multifactor ETFs will have a place in the “research tested” index fund investing sphere.

Hot off the etf.com press is what Sumit Roy calls “Smart Beta 2.0: Multifactor ETFs”. Msci world index wiki So, what exactly are multifactor ETFs and should you add some of these newer takes on index fund investments to your portfolio? What’s the Difference Between Single Factor ETFs and Multifactor ETFs?

A single factor ETF sticks with one investment approach-such as an S&P 500 index fund, an all-world international stock fund or the newer iShares Edge MSCI Min Vol USA ETF (USMV).


Msci events One advantage of most single factor ETFs is their low expense ratios, frequently below 0.15%.

First, let’s back up a bit into the investing research archives. Msci eafe small cap index By now, most investors understand that over the long term, index fund investing typically beats active fund management. Msci world real estate index In short, invest in an S&P 500 fund that copies the holdings in the unmanaged S&P index for a low annual fee of 0.09% and when the S&P goes up, so does your fund and vice versa. Msci world esg index Scores of other types of index funds are also available such as small-cap, value, bond fund, international and more. Msci world index bloomberg Yet, there are several factors that have been proven to beat a strict diversified market matching index fund approach. Msci developed markets These market anomalies or factors that frequently beat the market returns are:

Value stocks-Stocks that are considered under-valued or low priced. Msci index list These are identified by certain ratios such as book to market, price to earnings, and more.

Small capitalization stocks-Smaller-sized companies frequently grow more quickly than their larger counterparts. Msci currency index This is not surprising as it’s easier for a firm earning $100 million revenue to double in size than it is for one earning $5 billion revenue.

Although, in the past, these factors tended to outperform the broader markets, there’s no guarantee that they will continue to do so in the future. Msci chicago There are no future guarantees in the investment markets. What is msci eafe And even if these factors do outperform in the future, there are likely to be periods when strict indexing works out the best.

Multifactor investing combines several factors into one fund in the hope of limiting the underperformance of one factor during a given time period. Msci world value factor The idea is that if more factors are combined into one investment, the multifactor ETF will outperform the overall market, with less volatility. Msci brazil Multifactor ETF Investing Attempts to Capitalize on Market Anomalies

According to a MSCI research paper, “multi-factor index allocations historically have demonstrated similar premiums over the long run to individual factors but with milder fluctuations.”

Recently, many fund companies are jumping in on the multifactor ETF investing bandwagon with a variety of factor combinations. What does msci stand for Yet, this multifactor investing approach isn’t as easy as it seems – the investment manager must figure out which factors to combine. Msci etf list The Sumit Roy ETF.com article discusses the issues and asks, does the investor want to increase the “risk-adjusted” returns or just limit the fund losses? Investors that tolerate greater risk may prefer a different multifactor ETF fund than conservative investors.

One of the benefits of the multifactor approach, is that managers are using computerized algorithms to pick the appropriate stocks for the ETFs. Msci index pakistan This keeps the management costs down-good news for investors. Etf msci world index In fact, the new robo-advisors are at the fore of the computerized investing trend.

But which multifactor ETF should you choose? Morningstar counts 300 funds in this category to date with assets of $251 billion. What is the msci index In fact, this year more multifactor ETFs have been created than any other fund type.

Since most of the funds are newer, long term performance returns aren’t readily available. Msci eafe returns The industry states that the market beating factors may take a long time to show their strength, thus investing in multifactor ETFs should not be a trading strategy, but a buy and hold tactic.

Whether the multifactor ETFs beat the monkey approach remains to be seen. Msci world index yahoo For those not familiar with “monkey investing”, it’s the idea that you get enough monkeys throwing darts at various portfolios, and one monkey is bound to outperform the others. Msci world index 2015 Multifactor ETF Investing Drilldown

Low Risk Multifactor-JPMorgan Diversified Return U.S. Msci world minimum volatility index Equity ETF (JPUS) has a reasonable 0.29% expense ratio and gives large and mid-cap U.S. Msci finance stocks scores based on their value, momentum and return on equity factors. Msci world index historical chart It compares the scores against its peers to choose the best candidates for the specific factors. Msci world chart Incidentally, Morningstar found that approximately 82% of its portfolio is the same as the Russell 1000 index.

Value and Momentum Multifactor-The AQR Large Cap Multi-Style (QCELX) mutual fund has a heftier expense ratio at 0.45%. Msci eafe AQR scores each of the 1,000 largest U.S. Msci world ex us stocks according to their value, momentum and profitability metrics. Msci quote The hope is that strong characteristics in one area will make up for weaker ones in another. Msci world index ex australia The portfolio rebalances monthly.

The Kitchen Sink Multifactor-The iShares FactorSelect MSCI USA ETF (LRGF) takes a broader factor scope. Db x trackers msci world index ucits etf 1c test This ETF is exposed to value, momentum, small cap and quality indicators. Msci world index eur The broad-based multifactor ETF includes large and mid-cap stocks and strives to copy the risk profile of the MSCI USA index with a complicated weighting formula.

Variable Weight Multifactor-The Franklin Templeton multifactor LibertyQ ETF (FLQG), with an expense ratio of 0.35%, concentrates on four factors and apportions the holdings according to factor importance. Msci a share The funds starts with an index of 570 stocks and weights quality and value factors the heaviest. Msci data Momentum and low volatility are smaller factors in calculating stock-index percentages.

Low-Fee Multifactor-The $6 million SODR MSCI USA Quality Mix ETF (QUS) combines value, quality and minimum volatility in an equal weight portfolio. Msci index constituents The fund holds 610 large and mid-cap stocks and doesn’t carry momentum stocks. Msci emerging markets etf This fund brags a rock-bottom 0.15% expense ratio.

If you want to dip your toe into multifactor ETF investing, do your homework first. Msci world index isin Examine expense ratios and investment approaches. Msci com Personally, the QUS seems promising due to its avoidance of a strategy-momentum investing-that I’m not fond of and the low 0.15% management fee. Msci index returns That said, I’m unclear as to why someone interested in capitalizing on market anomalies might not buy individual small-cap, value or low-volatility ETFs that typically have lower expense ratios.