Expanding the growing group of smart-beta strategies, exchange traded fund providers are crafting multi-faceted funds with a medley of investment factors to help investors stay ahead of the markets.
For instance, Global X recently launched its suite of so-called scientific beta ETFs that are based off Edhec-Risk Institute indices that utilize multiple factors, including low-volatility, momentum, size and value.
The recently launched ETFs include the Global X Scientific Beta US ETF (SCIU) , which tries to outpace cap-weighted indices with less volatility, Global X Scientific Beta Europe ETF (SCID) , Global X Scientific Beta Asia ex-Japan ETF (SCIX) and Global X Scientific Beta Japan ETF (SCIJ) . [Beta Gets Scientific With These new Global X ETFs]
BlackRock (BLK) iShares also bolstered its smart-beta lineup with a group of FactorSelect MSCI ETFs, including the iShares FactorSelect MSCI USA ETF (LRGF) , iShares FactorSelect MSCI USA Small-Cap ETF (SMLF) , iShares FactorSelect MSCI International ETF (INTF) , iShares FactorSelect MSCI Intl Small-Cap ETF (ISCF) and iShares FactorSelect MSCI Global ETF (ACWF) . [BlackRock Bolsters Smart Beta Lineup With Five New ETFs]
The new FactorSelect ETFs also track smart-beta indices that select components based off four factors, including quality, momentum, value and size.
Through a multi-factored approach, these new smart-beta 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.
Specifically, some argue that cap-weighted indices may put an investor at risk of chasing a rally since the best performing stocks would gain the most assets and typically have the largest weight in an index.
However, by combing through a number of factors in weighting a stock component, these ETFs try to provide a more diversified investment approach.
For instance, the quality metric may define stocks based on consistency in earnings and balance sheet strength. Historically, high-quality stocks have outperformed lower-quality names since speculators may engage in lottery-like behavior.
The momentum theme helps investors target stocks with higher relative performance that may continue to maintain its strong performance over the near-term.
The value strategy has been a long-standing investment theme, favoring stocks that are relatively cheap to fundamentals. Value stocks have also historically outperformed growth stocks over the long-term.
Additionally, due to their factor tilts, many of these smart-beta ETFs may lean toward smaller companies, which carry high growth potential and have historically outperformed large-cap stocks.
For more information on smart beta ETFs, visit our smart beta category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.