Factors as a Smarter Way to Create Index ETFs
This article was originally published on ETFTrends.com.
Investors have been acquainted with styles or investing in asset categories for many years, and ETF providers have taken this investment approach to the next step through factor-based or smart beta strategies.
"The idea was: let's experiment with some of these other factors - low volatility, momentum, quality, for example, and we've really kind of started with a very complicated multi-factor approach," Dan Draper, Managing Director and Global Head of Invesco ETFs at Invesco Ltd., said at the 2018 Morningstar Investment Conference.
"Factor diversification can really matter, especailly for long-term investors," Draper added.
For example, the Invesco Dynamic Market ETF (PWC) was the first quantitatively constructed “intelligent” ETF launched in 2003. PWC tracks companies with superior risk-return profiles based on fundamental growth, stock valuation, investment timeliness and risk factors. Over the past 15-years, PWC has shown an average annualized return of 10.0%, compared to the S&P 500's 9.7%.
As smart beta or factor-based investments become more widely accepted, there is an ongoing need for education. Many investors have not correctly categorized their specific factor investments and may have unintentional exposure to various other attributes.
"You'll find an institutional investor - well I've really have a value focus. Let's look at that portfolio. Did you actually realize that there was maybe 20 percent in quality or 20 percent in low volatility. Was that an intended decision you made at the beginning? And at a basic, that's just new information," Draper said.
"So it's really starting first about attribution and then helping to educate about putting factors together better on a portfolio level," Draper added.
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.
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