Multi-factor exchange traded funds, or those ETFs offering investors exposure to multiple investment factors, are increasingly popular with advisors and investors. Some big-name investment houses are seizing upon that theme as highlighted by the spate of new multi-factor product launches over the past year.
For instance, John Hancock offers broad smart-beta ETFs to fill out a core portfolio position, including the John Hancock Multifactor Large Cap ETF (JHML) and John Hancock Multifactor Mid Cap ETF (JHMM) , along with a suite of multifactor sector-specific ETF strategies for investors seeking to overweight targeted areas of the market.
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The John Hancock Multifactor ETFs track indices developed by Dimensional Fund Advisors, which will act as the subadvisor to the funds.
“There are almost 200 multifactor ETFs on the market, with total assets of $36 billion, according to Morningstar. More than a third were launched just in the past year,” reports Chris Dieterich for Barron’s.
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Cap-weighted indices may also expose investors to other fundamental risks as the weighting methodology would attach more weight toward indebted countries or companies Multi-factor benchmarks attempt to avoid such problems. Frequently used factors in multi-factor indexes include, value, growth, quality and low volatility.
Value is a composite measure of cash-flow yield, earnings yield and sales-to-price. Quality is a measure of a company’s profitability, efficiency, earnings quality and leverage. Momentum shows the 11-month total return, lagged 1 month. Volatility represents the standard deviation of five years of weekly total returns of each company stock. Lastly, size encompasses each company’s full market-capitalization in U.S. dollars.
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“Fund companies say that blending factors leads to diversification and shields investors when single factors, such as growth or value, fall out of favor. Transparent and rules-based multifactor ETFs are intended as core portfolio holdings that complement market-cap-weighted index funds,” according to Barron’s.
Some multi-factor ETFs are finding rapid success, including the Goldman Sachs lineup of Active Beta ETFs, such as the Goldman Sachs ActiveBeta International Equity ETF (GSIE) , Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) and Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM) .