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Should You Invest in Factor & Smart Beta ETFs?

Neena Mishra
  • (0:35) - What Is Factor and Smart Beta Investing?

  • (7:00) - Which Factors Have The Best Performance?

  • (13:50) - What Strategies and Sectors Will Perform The Best In 2020?

  • (24:30) - Will International Stocks Make A Comeback?

  • Podcats@Zacks.com

In this episode of ETF Spotlight, I speak with Alec Young, Managing Director of Global Markets Research at FTSE Russell. We talk about factor investing, which is one of the faster growing areas of the ETF market.

Factor and smart beta basically seek to combine the best of active and passive investing—seeking to outperform the market while keeping costs low and following rules based, transparent index methodologies.

Per BlackRock,the factor industry is estimated at $1.9 trillion and is projected to grow to $3.4 trillion by 2022.

What is factor investing? What is the difference between factor investing and smart beta?

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.

The iShares Edge MSCI Min Vol U.S.A. ETF USMV was one of top asset gatherers last year. Quality ETFs such as the iShares Edge MSCI U.S.A. Quality Factor ETF QUAL and the Invesco S&P 500 Quality ETF SPHQ were also very popular with investors.

Do these factors produce persistent risk-adjusted premium over time? Which factors have delivered the best returns historically?

Quality ETFs usually have a large exposure to big tech companies like Apple AAPL and Microsoft MSFT and have benefitted from tech’s spectacular performance last year.

Factor returns have generally proven to be highly cyclical and timing the market is never easy. 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 Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF GSLC and the iShares Edge MSCI Multifactor U.S.A. ETF LRGF focus on a combination of factors including value, quality, and momentum.

How did factors perform in 2019 and which factors should investors focus on in 2020?

Make sure to be on the lookout for the next edition of ETF Spotlight! If you have any comments or questions, please email podcast@zacks.com

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Apple Inc. (AAPL) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
Invesco S&P 500 Quality ETF (SPHQ): ETF Research Reports
 
Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC): ETF Research Reports
 
iShares Edge MSCI Multifactor USA ETF (LRGF): ETF Research Reports
 
iShares Edge MSCI Min Vol USA ETF (USMV): ETF Research Reports
 
iShares Edge MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
 
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Zacks Investment Research