The markets have witnessed bouts of volatility that hampered the march forward, but investors are turning to smart beta or multi-factor exchange traded fund strategies to limit the downside risks while still looking to capture any further upside ahead.
“We kind of see similar warning signs for some rough waters ahead, so we found that our clients like our multi-factor strategy, USMC, which offers embedded within it multiple factors, obviously; mega-cap exposures, which means 50 of the largest companies, which tend to be the strongest in terms of balance sheet in terms of earning power and clearly able to weather the storm; and then we also embed a low-vol factor in there. That strategy has outperformed since inception and particularly during rough patches,” Paul Kim, Managing Director, ETF Strategy, Principal Global Investors, said at the Morningstar Investment Conference.
The Principal U.S. Mega-Cap Multi-Factor Index ETF (USMC n/a) is comprised of companies with the largest market capitalization taken from the Nasdaq U.S. 500 Large Cap Index and screened based on a quantitative model. USMC is a multi-factor fund, an increasingly popular strategy within the broader smart beta universe.
USMC’s underlying index utilizes a modified equal-dollar weighting methodology where securities in the top 10% of aggregate market capitalization are weighted by market-cap, but the remaining securities are equally weighted and volatility adjusted to give a higher tilt toward those that are more liquid and less volatile.
The ETF can potentially provide investors a systematic tilt toward lower historical volatility as a way to provide more stability and better downside protection, along with a highly focused, yet risk-aware, exposure to mega-cap in an attempt to help investors generate better risk-adjusted returns over the long haul.
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