This article was originally published on ETFTrends.com.
Over the past few years, money managers and fund sponsors started to roll out rules-based, transparent index ETFs that combined some of the attributes that have historically provided active managers with outperformance, such as prominent investment factors like quality, momentum, value, low volatility and size.
“This strategy has delivered stronger value and mid-cap tilts than many of its multifactor peers,” said Morningstar in a recent note. “It aggressively pursues its targeted factors and has a higher active share than many other multifactor strategies. This strategy further strengthens its style tilts by considering its holdings' factor exposures holistically rather than mixing stocks that score well on different individual factors, which can dilute the portfolio's factor exposures.”
The $1 billion LRGF tracks the MSCI USA Diversified Multiple-Factor Index and holds 153 stocks.
Examining Multi-Factor's Intent
Hundreds of new ETFs debuted in 2018, including a wide range of smart beta strategies. Plenty of multi-factor funds, those ETFs emphasizing multiple investment factors, were include in 2018’s crop of rookie ETFs.
Multi-factor ETFs try to deliver enhanced returns and maximize diversification in an attempt to provide potentially improved risk-adjusted returns, compared to traditional market-capitalization-weighted indices.
“LRGF uses an optimizer to construct its portfolio that weighs each stock's targeted factor characteristics against its contribution to portfolio risk,” according to Morningstar. “This approach shrinks its allocation to factors as their volatility increases. This approach increases the ETF's cumulative factor exposure while keeping its risk in line with its starting universe. By targeting factors with low correlations to each other and by constraining its stock and sector weightings, this strategy should diversify risk. But the optimization process is complex and opaque, which makes it difficult to assess how the portfolio will shake out.”
LRGF allocates almost 21% of its weight to tech stocks and over 28% of its combined weight to the healthcare and industrial sectors.
Morningstar has a Bronze rating on the ETF.
For more information on multi-factor strategies, visit our smart beta category.
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