WisdomTree Has Its Say In Multifactor ETF Race

WisdomTree Investments, Inc. WETF, one of the pioneers of smart beta exchange-traded funds, added to its already robust suite of fundamentally-weighted ETFs Thursday with the debut of the WisdomTree U.S. Multifactor Fund USMF.

The new ETF tracks the WisdomTree U.S. Multifactor Index, a benchmark “comprised of 200 U.S. companies with the highest composite scores based on two fundamental factors, value and quality measures, and two technical factors, momentum and correlation,” according to WisdomTree. The index debuted earlier this month.

USMF is favorably priced at 0.28 percent per year, or $28 on a $10,000 investment. That is below average for smart beta ETFs and well below what investors would expect to pay on an actively managed mutual fund. The new ETF holds nearly 200 stocks, none of which exceed an allocation of 1.36 percent.

Combining Passive And Active

It is often said the smart beta ETFs blur the line between active and passive strategies. That can be particularly true of mutli-factor funds, a growing part of the smart beta space that help investors ease the difficulty of timing individual investment factors.

“Many investment managers describe the asset management spectrum as ranging from passive on one end of the continuum to active on the other,” said WisdomTree in a note. “Because ‘smart beta’ and factor strategies combine elements of passive and active, such strategies usually exist in the middle of this continuum. They have a similar goal as active managers—to try to outperform the market—but typically try to do so through a rules-based approach that can be codified into a stock index.”

There are advantages to multifactor strategies. For example, value is known to outperform, but that trend was betrayed for a decade. Likewise, some single factor ETFs make substantial sector bets, such as low volatility funds featuring large weights to consumer staples or utilities stocks.

A Different View

USMF's underlying index features exposure to 10 industry groups, translating to seven of the 11 S&P 500 sectors being represented in the fund. Technology stocks account for almost 24 percent of the new ETF's weight while financial services and healthcare stocks combine for nearly 27 percent.

“In a strategy that seeks to add alpha, one must take meaningful stock selection risk,” said WisdomTree. “We believe employing factor diversification improves the merits of stock selection and is a key element in shaping WisdomTree’s thinking on a more 'active' index methodology.”