Marveling At Multi-Factor ETFs

Within the smart beta exchange-traded funds arena, multi-factor funds are one of the important growth frontiers. Competitors in the multi-factor ETF fray include not only traditional ETF providers, but some big Wall Street names, such as Goldman Sachs Group Inc GS and JPMorgan Chase & Co. JPM.

“In recent years, the asset management industry seemingly came to an agreement to focus on five factors: quality, momentum, value, low volatility and size,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Thursday. “However, CFRA thinks a challenge in using a product focused on a single factor is the patience required when as a factor loses favor, causing the ETF to lose money before bouncing back.”

Part of the allure of multi-factor ETFs is that they help investors avoid the burdensome effort of timing individual investment factors. From year-to-year, various factors lead and others lag. Those trends change, increasing the difficulty in factor timing.

An Idea From JPMorgan

The JPMorgan Diversified Return U.S. Equity ETF JPUS is one of the most popular ETFs in the JPMorgan stable.

The index JPUS follows “sets its sector weightings on the basis of the inverse of each sector's historical volatility. This effectively spreads sector-specific risk more evenly. The index then populates each sector with those stocks that earn the highest composite scores based on measures of value, momentum, size, and low volatility. Stocks that score poorly on these measures are tossed out,” according to Morningstar.

Since coming to market in late 2015, JPUS has outperformed the S&P 500 by 340 basis points.

Goldman's Offering

The Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF GSLC is Goldman's entrant into the growing field of U.S.-focused, large-cap, multi-factor ETFs. GSLC also debuted in late 2015, but has rapidly established a following as highlighted by the ETF's more than $2.2 billion in assets under management.

Charging just 0.09 percent per year has helped GSLC attract assets. The average expense ratio for ETFs in the Morningstar US ETF Large Blend Strategic Beta category is 0.38 percent per year, and the average annual fee for funds in the Morningstar US ETF Large Blend Index group is 0.36 percent, according to Goldman.

“CFRA Research expects advisors and investors will further seek out multi-factor ETFs that feel more like active management than S&P 500 index-based ETFs and market-cap weighted peers, but are cheaper than the 1.1 percent expense ratio for a large-cap mutual fund,” said Rosenbluth. “If they do, we hope they do their homework and look inside the portfolios first.”

CFRA rates JPUS Market Weight and GSLC Overweight.