Finding Fabulous Factors In This ETF

An increasing number of exchange-traded funds offer investors exposure to multiple investment factors under the roof of one fund. Known as multi-factor funds, these ETFs help investors ease the burden of identifying when a specific investment factor will work or fall out of favor.

The iShares Edge MSCI Multifactor USA ETF LRGF is becoming one of the more venerable names among multi-factor ETFs. LRGF celebrates its third birthday next month and is close to having $1 billion in assets under management, putting in the upper echelon of large-cap, U.S. multi-factor ETFs in terms of assets controlled.

The ETF “seeks to maximize exposure to factors that have historically outperformed the broad market (quality, value, size and momentum), while maintaining a similar level of market risk,” according to iShares.

Comments And Concerns

Since coming to market, LRGF has slightly outpaced the Russell 1000 Index while trailing the S&P 500. Some analysts aren't necessarily bearish on LRGF, but necessarily enthusiastic, either.

“The fund's factor tilts are stronger than most of its peers', but its portfolio construction is opaque and complex,” said Morningstar in a note out Friday. “The fund's low fee and stringent risk management should contribute to its edge over the long run, but its short live track record limits its Morningstar Analyst Rating to Bronze.”

Morningstar was mostly kind in its assessment of LRGF, but the firm questioned the ETF's optimization process, calling it “complex and opaque, which makes it difficult to assess how the portfolio will shake out.”

LRGF reduces exposure to certain factors if volatility in those factors spikes.

More Details

LRGF holds nearly 150 stocks, 23.6 percent are technology names. The industrial and health care sectors combine for 26.5 percent of the ETF's weight. None of LRGF's components exceed weights of 5.1 percent. Despite some concerns about the overall methodology, LRGF does compare favorably against rival multi-factor ETFs.

“This strategy has delivered stronger value and mid-cap tilts than its multifactor peers,” said Morningstar. “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.”

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