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A Magnificent Multifactor Idea

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A Magnificent Multifactor Idea
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The landscape of multifactor exchange traded funds contains some funds that are not “old” in fund terms, but are nonetheless compelling. One of those funds is the Xtrackers Russell 1000 Comprehensive Factor ETF (NYSE: DEUS).

DEUS debuted in November 2015, meaning it does not yet have the three-, five- and 10-year track records on which so many fund industry observers rely. Youth, however, does not diminish the opportunity set with DEUS.

DEUS follows the Russell 1000 Comprehensive Factor Index, a smart beta spin on the widely followed Russell 1000 Index. That index “is designed to provide exposure to domestic equities based on five factors — quality, value, momentum, low volatility and size,” according to DWS.

Inside The DEUS Methodology

DEUS takes the Russell 1000 and adjusts the equities based on the aforementioned factors. The resulting portfolio contains 810 stocks.

“To do this, the fund multiplies each stock's market cap weighting by each of its individual factor scores and rescales the weightings to 100 percent,” Morningstar said in a recent research piece. “As a result, stocks that score poorly on any one dimension tend to receive low weightings in the portfolio or are excluded altogether. While the fund excludes stocks with very small implied weightings, it currently holds around 800 of the 1,000 stocks in its selection universe.”

Consumer discretionary and industrial stocks combine for one-third of the DEUS roster, while technology and financial services stocks combine for 29.53 percent. Only one holding, Baxter International (NYSE: BAX), has a weight of over 1 percent in DEUS.

“DEUS does not make any sector-relative adjustments in its assessment of value and quality,” said Morningstar.

Less Risky

Relative to other domestic large-cap multifactor ETFs, DEUS could be less volatile over the long term, meaning investors also stand a chance of leaving some upside on the table when stocks are trending higher.

“Its explicit inclusion of low volatility enhances its quality tilt (as these two factors are correlated) and should help it hold up a little better during market downturns,” said Morningstar. “However, these less aggressive tilts can also limit the fund's upside potential.”

Related Links:

A Leading Multi-Factor ETF

A New Quality ETF

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