In this episode of ETF Spotlight, I talk with Rolf Agather, Managing Director of North America Research at FTSE Russell.
We discuss smart beta and factor investing, which are among the hottest trends in the ETF industry. Smart beta strategies combine the best of active and passive investing—seeking to outperform the market while keeping costs low and following a set of rules based, transparent strategies.
Factor investing is a sub-set of smart beta strategies. Academic research shows that long-term stock portfolio performance can be explained by exposure to certain factors such as value, size, momentum, low volatility, quality and yield. Investors now have access to a wide range of single factor and multifactor ETFs from many issuers that provide exposure to these strategies.
Per BlackRock, the factor industry is estimated at $1.9 trillion currently and is projected to grow to $3.4 trillion by 2022.
Quality ETFs like the iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) and the Invesco S&P 500 Quality ETF (SPHQ) are really popular this year.
Do these factors produce persistent risk-adjusted premium over time? Find out on the podcast. We also discuss how investors should look at factor indexes versus market cap weighted indexes and whether there are any risks that investors need to be aware of.
Factor returns have generally proven to be highly cyclical and timing the market is never easy. How should investors use these strategies in their portfolios? Can a combination of factor strategies produce meaningful outperformance over traditional market cap weighted ETFs? Should investors use multifactor strategies instead of investing in several different factor ETFs?
The Xtrackers Russell 1000 US QARP ETF (QARP - Free Report) is a multifactor ETF that provides exposure to large-cap US stocks with strong quality scores based on factors such as profitability, efficiency, earnings quality and leverage, relative to their peers, that are also attractively priced. Apple (AAPL - Free Report) , Johnson & Johnson (JNJ - Free Report) and Exxon Mobil (XOM - Free Report) are its top holdings.
There was a lot of interest in defensive strategies late last year due to heightened volatility. ETFs that focus on less risky stocks like the iShares Edge MSCI Min Vol USA ETF (USMV - Free Report) and the Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) were among the most popular ETFs. How did defensive strategies perform when markets were very choppy?
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