Exploring the World of Factor ETFs

Factor ETFs are a type of investment that focuses on specific characteristics or traits of stocks, such as value, momentum, or size. These ETFs aim to capture the returns associated with these factors.

By investing in a value factor ETF, you can tap into the historical outperformance of value stocks compared to growth stocks. For example, the MSCI USA Value Index has outperformed the MSCI USA Growth Index over the long term.

Investors can also use factor ETFs to gain exposure to other factors such as size, momentum, and quality. For instance, the Russell 1000 Growth Index has outperformed the Russell 1000 Value Index over the long term.

Factor ETFs can be a useful tool for investors looking to add diversification to their portfolios.

Factor ETFs are a game-changer for investors. They help reduce portfolio volatility or improve returns by capturing the power of factors, which are persistent and well-documented asset characteristics that drive investment risk and return.

Factors are not new, but exchange-traded funds (ETFs) have made it easier for everyday investors to access these strategies. Investing in specific factors can help investors reach their goals.

Factor ETFs deliver the power of time-tested investment screens in a low-cost and tax-efficient investment vehicle. This revolutionizes access for everyday investors, making it possible to invest in stocks that exhibit the factors that have historically driven portfolio returns.

There are five factors that have historically proven to be drivers of return: Quality, Minimum Volatility, Size, Momentum, and Value. These factors can be used to identify companies with strong and healthy balance sheets, stocks that are less volatile than the broad market, smaller and more nimble companies, stocks on an upswing, and inexpensive stocks relative to their fundamentals.

Here are the five factors with a brief description:

Choosing a Factor ETF can be a bit overwhelming, especially with over 300 factors to select from. The good news is that most main ETF providers offer factor ETFs on a core set of factors, including Value, Dividend, Low Volatility, Momentum, and Quality.

These factors have been extensively researched and studied, with many being based on well-known and widely accepted metrics. For example, the original definition of Value was based on the book-to-market ratio, an indicator of companies' financial health.

When selecting a factor ETF, it's essential to consider the underlying index and how it captures the targeted factor. Research has shown that sector bets versus the broad market are constrained in these portfolios, but this isn't the case for the iShares MSCI World ex Australia Momentum ETF (IMTM).

Here's a brief overview of the main factor ETF options:

By understanding the key characteristics of each factor ETF, you can make an informed decision that aligns with your investment goals and risk tolerance.

If you're an adviser looking to stay on top of the latest market trends, we've got you covered.

You can examine the factor exposures of several popular market capitalisation indexes and how they vary over time.

Our ETF insights and resources section offers access to the latest information on investment opportunities and ways to use ETFs in your portfolio.

For a deeper dive into ETFs, you can view all adviser education content, which includes a range of articles and resources to help you make informed decisions.

If you're interested in learning more about ETF distributions, you can view all investor education content, which provides a comprehensive overview of the different distribution outcomes available to Australian investors.

Here are some key resources to get you started:

Factor ETFs can perform very differently, even for the same factor, due to varying implementations.

For example, State Street Value recorded a return of 57.99% between 2019 and 2022, significantly outperforming iShares Value, which achieved a return of 40.44%.

Weighting schemes, rebalancing periods, and selection methodologies can all contribute to the differences in results achieved by different funds.

The frequency of rebalancing, for instance, can impact an ETF provider's performance, with some funds rebalancing more frequently than others.

Selection methodologies can also vary, with some factors lacking standard selection criteria, leading to different methodologies, scores, and ranking systems.

Long-only or long-short investment strategies can also affect performance, with some funds giving an overweight to certain stocks or constructing a long-short portfolio.

To evaluate factor ETFs, we need a framework to analyze their performance, going beyond just absolute returns.

Annualized return, annualized volatility, Sharpe Ratio, beta to S&P 500, and expense ratio are essential indicators to consider.

Here's a comparison of dividend ETFs offered by iShares, State Street, and Vanguard, based on these indicators:

These indicators provide a more comprehensive view of each fund's performance, helping investors make informed decisions based on their risk aversion and risk tolerance.

Factor ETFs offer tailored strategies to meet specific investment goals, such as mitigating risk and adding diversification. This can be achieved through smart beta investing, which provides an alternative approach to weighting by market cap.

One way to approach smart beta investing is through multi-factor strategies, such as the Invesco S&P 500 QVM Multifactor ETF (QVML). This ETF targets securities with specific characteristics, including value, quality, momentum, size, and minimum volatility.

Factor investing involves targeting securities with specific characteristics, such as value, quality, momentum, size, and minimum volatility. These persistent characteristics can help investors understand differences in expected return and provide tools for seeking outperformance.

Our smart beta ETF lineup offers concentrated factor exposure through a methodical stock selection process with either unconstrained or wide-sector constraints. This can be done through equal weight and revenue-weighted smart beta ETFs, which aim to provide diversified exposure to a variety of factors.

Five key factors have shown to be resilient across time, markets, asset classes, and have a strong economic rationale: value, quality, momentum, size, and minimum volatility. These factors can be targeted through single-factor strategies that seek to provide exposure to a single factor that could be a long-term driver of returns.

Here are some examples of factor ETFs that offer single-factor exposure:

Investing is a strategy of targeting securities with specific characteristics such as value, quality, momentum, size, and minimum volatility.

Factor investing is a data-driven approach that prioritizes identifying certain characteristics that historically outperform the broader market on a risk-adjusted basis.

Investors use factor investing to seek outperformance by selecting a group of stocks based on these characteristics and constructing a portfolio around it.

The idea of factor investing originated from a research study in 1992 and is widely adopted by investors.

Many ETF providers now offer factor-based strategies that actively select stocks, making it easy to implement factor investing across a wide range of portfolios.

To invest in any specific factor, you can simply purchase the units of some of the most liquid ETFs.

Smart beta investing can help meet specific investment goals, such as mitigating risk, adding diversification, avoiding overconcentration, and generating income potential.

One of the key benefits of smart beta investing is its ability to provide tailored strategies that meet specific investment objectives. For example, the Invesco S&P 500 QVM Multifactor ETF (QVML) uses a multi-factor strategy to help investors achieve their goals.

Investors can use factor ETFs to gain exposure to specific characteristics such as value, quality, momentum, size, and minimum volatility. BlackRock has identified five factors that have shown to be resilient across time, markets, asset classes, and have a strong economic rationale.

These factors include investing in stocks that are lower cost relative to their peers, investing in companies with strong financials relative to similar cost peers, investing in stocks that are outperforming and reducing exposure to stocks that are underperforming, investing in stocks that collectively have lower volatility than the broad market, and investing in stocks that possess key characteristics that have historically driven equity market returns.

Here are some examples of how factor ETFs can be used to achieve different investment objectives:

By using factor ETFs, investors can create tailored strategies that meet their specific investment goals and objectives.

Factor investing is a widely recognized concept in the financial industry that aims to decompose returns into identifiable factors.

Decades of research have supported this investment approach, showing its potential to boost a portfolio's risk-adjusted performance over the long term.

There are plenty of factors to consider, which can make it difficult for uninformed investors to understand which ones to invest in.

The methodology behind each factor is sometimes unclear, and investors may be exposed to factors that are constructed in a way that is different from what they anticipated.

Factors can go through periods of underperformance, requiring a long period of time before an investor can start seeing superior returns from factor investing.

Investors would benefit from dedicating time to comprehending the underlying factors within each fund to mitigate potential risks and optimize the overall effectiveness of the strategy.

Optionality is a key consideration for investors looking to optimize their portfolios. We offer a broad selection of smart beta ETF solutions that expand across asset classes, sizes, and sectors.

A comprehensive smart beta strategy can help investors diversify their holdings and reduce risk. Our smart beta ETFs cover a wide range of asset classes, including stocks, bonds, and commodities.

By offering a broad selection of smart beta ETFs, we enable investors to tailor their portfolios to their individual needs and risk tolerance. This means investors can choose from a range of ETFs that align with their investment goals and risk preferences.