Evaluating A Pair Of Multi-Factor ETFs

Multi-factor exchange-traded funds are an increasingly popular segment of the broader ETF landscape. Perhaps part of the reason why investors are embracing these ETFs is that timing individual investment factors, such as low volatility, momentum and value, is difficult.

Multi-factor ETFs offer investors exposure to several investment factors — the idea being that investors don't need to time when a certain factor will perform well and when others will fall out of favor. Notable issuers, including Goldman Sachs Group Inc GS, JPMorgan Chase & Co. JPM and John Hancock, have brought multi-factor offerings to market.

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The iShares Edge MSCI Multifactor USA ETF LRGF debuted in April 2015. That ETF follows the MSCI USA Diversified Multiple-Factor Index. LRGF holds large- and mid-cap stocks.

A Little More About LRGF

“LRGF combines quality and value with size and momentum strategies in one ETF, providing factor diversification. LRGF is one of many multi-factor ETFs to come to market in the last two years and that ranks favorably to S&P Global Market Intelligence, based in part its appealing holdings and low costs,” said S&P Capital IQ in a note out Monday.

In its 17 months on the market, LRGF has amassed $110 million in assets under management.

Jumping Into The JHML

The John Hancock Mutlifactor Large Cap ETF JHML is another example of a successful though not old multi-factor ETF.

JHML “targets the largest 750 U.S. stocks, with a buffer to reduce turnover. Dimensional applies market-cap multipliers to emphasize stocks with the targeted size, value, and profitability characteristics. For example, the firm sorts all stocks in the eligible universe (excluding REITs) by price/book within each sector and creates five buckets, each representing a fifth of the available market capitalization,” according to Morningstar.

Technology, consumer discretionary and healthcare stocks combine for over 46 percent of JHML's lineup. The ETF turns a year old this week and has nearly $270 million in assets under management.

"JHML works with quantitative firm Dimensional Fund Advisors and focuses on size, value and quality factors, but not momentum or low volatility. Relative to LRGF, JHML has less exposure to financials (13 percent of assets vs. 18 percent) and more in consumer staples (9 percent vs. 5 percent). Procter & Gamble Co PG is an example of top-10 holding for JHML not inside LRGF," added S&P Capital IQ.

The research firm has an Overweight rating on LRGF and a Marketweight rating on JHML.

Full ratings data available on Benzinga Pro.