Quality Works For This Global ETF

Smart or strategic beta exchange traded funds are hot and one of the growing sub-trends within the broader strategic beta movement is the burgeoning population of multifactor ETFs, or those funds purporting to subscribe to multiple investment factors such as growth, momentum, quality and value.

Endorsers of the multifactor make reasonable, if not simple claims. Namely, they are apt to say there are times one factor outperforms another and rather than trying to isolate the best factor in a given period, investors are better off embracing the mutlifactor approach.

The recent performance of the JPMorgan Diversified Return Global Equity ETF JPGE indicates that, on a global level, the multifactor approach merits consideration. JPGE, which debuted in June 2014 and is now home to nearly $50 million in assets under management, is a global developed markets ETF in that is larges country weights are 26.5 percent to the U.S., 26.5 percent to Asia ex-Japan and 24.1 percent to Europe. 

JPGE, which has returned almost six percent over the past year, tracks the FTSE Developed Diversified Factor Index. FTSE Russell, one of the largest providers of indexes for use by ETF issuers, recently analyzed the FTSE Developed Diversified Factor Index's performance during Aug. 17 through Oct. 9 time frame, a period that included some elevated market volatility. JPGE and the FTSE Developed Diversified Factor Index came out looking solid.

“Factor indexes are designed to break broad market performance into specific drivers, such as momentum, volatility, quality and value to better understand the different performance characteristics of different types of stocks in certain time periods,” said FTSE Russell in a recent note. “FTSE Russell’s analysis indicates that, between 17 August and 9 October when the global equity markets experienced heightened volatility, quality-oriented indexes such as the FTSE Developed Quality Index and FTSE Developed Low Volatility Index, as expected, saw less downside impact than value-oriented indexes.” 

Year-to-date, JPGE has outperformed traditional ex-U.S. developed market and all-country world benchmarks. JPGE's underlying FTSE index combines the low volatility, momentum, small-cap stocks and value factors. The ETF's nearly 500 holdings are selected based on a composite score of those factors and liquidity factors, according to the index provider. 

JPGE's sectors are broken out on a regional basis with North American consumer staples being the ETF's largest sector weight at 3.8 percent and Japanese telecoms being the smallest sector allocation at 1.4 percent. Six of JPGE's top 10 regional sector weights are North American sectors.

“The subsequent market upswing has, as expected, shown a reversal, with low volatility and quality rising more slowly than value. Access to more precise market measurement tools can be helpful for all investors, particularly during times of heightened global market volatility, and this analysis helps demonstrate the potential value of a multi-factor approach to market analysis,” said FTSE Russell Senior Research Director Gareth Parker in the note.