Market Overview

Young Multifactor ETFs Lure Investors

Young Multifactor ETFs Lure Investors

Multifactor exchange traded funds are expected to be a future source of growth for the already fast-growing smart beta universe. Data suggest advisors and investors are likely to increase their use of multifactor ETFs in the years ahead. For now, many of the multifactor products on the market are still young, but lack of seasoning should not deter investors.

Next year could be significant for some multifactor ETFs when several members of this group will celebrate their three-year anniversaries — one of the milestones that's widely followed among fund investors.

“In 2018, seven differently constructed multifactor ETFs will hit their three-year anniversary, as asset managers begin offering a rules-based transparent approach that combines some of the attributes that historically provided active managers with outperformance,” CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth said in a recent note. “These five attributes, or factors, were quality, momentum, value, low volatility and size.” 

A Fine Start

TheGoldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSE: GSLC) turns three next September and is already solidifying itself as one of the dominant names among U.S. large-cap multifactor ETFs. Now home to $2.71 billion in assets under management, GSLC is easily one of the most successful ETFs that debuted in 2015.

GSCL follows the Goldman Sachs ActiveBeta U.S. Large Cap Equity Index, which “seeks to capture common sources of active equity returns, including value (i.e., the security's price compared to market value), momentum (i.e., performance history), quality (i.e., profitability relative to total assets) and volatility (i.e., consistency of returns),” according to Goldman.

Part of the reason GSLC has lured investors is its low fee. The ETF's annual expense ratio “is 9 basis points, compared to the industry average for smart beta ETFs of 35 basis points." 

A Rival

The iShares Edge MSCI Multifactor USA ETF (NYSE: LRGF), which turns three in April 2018, is a rival to GSLC. Home to $766 million in assets under management, LRGF tracks the MSCI USA Diversified Multiple-Factor Index.

In 2017, the two best performers and biggest asset gatherers of this multifactor group were LRGF and GSLC,” said Rosenbluth. “Both LRGF and GSLC utilize four factors to build their ETFs, with three overlapping ones (quality, value and momentum). LRGF includes size as the fourth factor, while GSLC adds in a low volatility component as the fourth factor.”

LRGF holds 148 stocks and is pricier than GSLC with an annual fee of 0.2 percent. CFRA rates LRGF Marketweight and GSLC Overweight.

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