GET SMART WITH FACTOR ETFs

Advisor Corner - Get smart with Factor ETFs.

MYTH BUSTING

MYTH BUSTING

What are the benefits of factor ETFs?

Performance: Factor ETF strategies seek to outperform traditionally weighted index funds, or enhance a portfolio in other ways, such as reducing vulnerability to stock market volatility. These strategies may also provide outperformance relative to traditional active mutual funds.

Outcome-Oriented: Factor ETFs can help improve your ability to align results with your preferences around risk aversion, cost reduction, etc.

Diversification: Factor ETF's variety of alternative index exposure can help you diversify your portfolio.

Do factor ETF strategies only consider equities?

Factor ETF strategies can be based on equity factors such as volatility, momentum, earnings or dividends. However, there are factors in all asset classes. BlackRock offers a variety of factor ETFs for bonds.

Are factor ETFs actively managed?"

Factor ETFs are typically not actively managed. However, the alternatively weighted composition of their components can allow more frequent fund analysis and rebalancing than traditional index funds. This allows them to potentially outperform a market index. Factor ETFs are often viewed as a hybrid between passively and actively managed strategies.

What are important considerations to factor ETFs?

Single Factor or Multifactor: Investors can invest in factor funds that are focused on single or multiple weighted factors. A multifactor factor ETF may offer less volatility risk.

The right investment: Factor ETFs can generally be divided into four types of strategies. Choose the strategy that best suits your preferences:

  • With factor-based strategies, the stocks are weighted or the factors are separated according to specific groups.
  • With equally weighted strategies, all factors are taken into account.
  • With fundamentally weighted strategies, the companies are selected and weighted according to fundamental factors.
  • With low volatility strategies, the exposures can be weighted according to their past volatility.

TYPES OF FACTOR

TYPES OF FACTOR

There are two main types of factors that have driven returns: macroeconomic factors, which capture broad risks across asset classes; and style factors, which help to explain returns and risk within asset classes.

1. Macroeconomic factors

Economic growth

Exposure to the business cycle

Real rates

The risk of interest-rate movements

Inflation

Exposure to changes in prices

Credit

Default risk from lending to companies

Emerging markets

Political and sovereign risks

Liquidity

Holding illiquid assets

 

2. Style factors

Value

Stocks discounted relative to their fundamentals

Minimum volatility

Stable, lower-risk stocks

Momentum

Stocks with upward price trends

Quality

Financially healthy companies

Size

Smaller, high-growth companies

Carry

Income incentive to hold riskier securities