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A Pair of Multifactor ETFs to Tackle Today’s Market Environment

This article was originally published on ETFTrends.com.

Given certain market conditions, investors need more than just a passive index that goes beyond a one-size-fits-all template that uses market cap weighting. While these indexes provided simple, low-cost solutions, particularly during the recovery after the Great Recession of 2008, and the recent bull run that saw the major indexes reach historic highs, the need for even greater scrutiny was necessary in the quest for more alpha —a case for smart beta.

In terms of defining smart beta, one may think of these strategies as passive strategies with an active element. Smart beta strategies aim to deliver returns using a rules-based and fully transparent approach to investing in the securities of a particular market index.

The potential benefits an investor can reap using a smart beta approach becomes fully apparent when considering that a market-cap-weighted index does not allow for favorable tilts toward any factors that have historically driven equity returns.

Through smart beta, investors get adaptable exposure with the rules-based approach in conjunction with reaping the rewards of diversification via access to a broad market index. In addition, the simplicity of buying a broad-based market index has a concentration of risk, and should a market correction ensue comparable to that witnessed in the fourth quarter, investors are left vulnerable.

As such, investors are willing to pay more for the supplemental benefits smart beta can provide, such as downside risk mitigation. Here are a pair of multifactor ETFs investors can consider in today's challenging market environs.

Oppenheimer Russell 1000 Dynamic Multifactor ETF (Cboe:OMFL) :

  • Provides access to a portfolio of U.S. large- and mid-cap stocks that score well for exposure to specific factors, including momentum, value, quality, size and low volatility.
  • Seeks to maximize exposure to these factors, which have historically driven long-term returns that outperform the broad market.
  • Capitalizes on the cyclicality of factor performance by employing a dynamic overlay that looks at leading economic indicators and market sentiment to determine the current market environment and then increases exposure to the factors that fare best in that environment.

Oppenheimer Russell 2000 Dynamic Multifactor ETF (OMFS) :

  • Provides access to a portfolio of U.S. small-cap stocks that score well for exposure to specific factors, including momentum, value, quality, size and low volatility.
  • Seeks to maximize exposure to these factors, which have historically driven long-term returns that outperform the broad market.
  • Capitalizes on the cyclicality of factor performance by employing a dynamic overlay that looks at leading economic indicators and market sentiment to determine the current market environment and then increases exposure to the factors that fare best in that environment.

Given the recent market challenges of trade wars and global economic growth, these ETFs are operating in "slowdown mode."

"Oppenheimer Russell Dynamic Multifactor ETFs remain in a 'slowdown' regime, resulting from a combination of still-above-trend U.S. economic activity and decelerating global risk appetite," the ETF Strategy Team wrote. "Our Dynamic Multi-Factor ETFs are tilted toward the quality and low volatility factors."

However, the funds do foresee sustained growth ahead nonetheless.

"Our leading economic indicators continue to suggest that the U.S. economy should grow above trend over the next few quarters," the team noted. "Recent headline GDP readings have come in above estimates and consumer confidence remains strong. However, recent business surveys continue to register a deceleration in manufacturing activity. Monetary conditions, as indicated by the yield curve, continue to imply a future slowdown in growth. Overall, the economic environment is still indicative of above-trend growth in the medium term."

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