While social media giant Facebook Inc. FB has recouped some of its late July losses, that swoon and the stock's status as the fourth-largest member of the S&P 500 serve as reminders about some of the potential perils of cap-weighted exchange traded funds.
Multi-factor ETFs eschew weighting by market value to focus on several investment factors, such as growth, low volatility, momentum, quality and value, among others. The multi-factor methodology can help reduce a fund's risk to company-specific events, such as Facebook's recent earnings disappointment.
What Happened
The JPMorgan Diversified Return U.S. Equity ETF JPUS is an example of a well-known multi-factor ETF that's proving relatively immune to the recent weakness in some big-name social media stocks.
JPUS, which turns three years old next month, “tracks the JP Morgan Diversified Factor US Equity Index, which utilizes a rules-based approach combining risk-weighted portfolio construction with multi-factor security screening based on value, quality and momentum factors,” according to JPMorgan Asset Management.
“The Russell 1000 index is heavily weighted to the technology sector and there's concentration in certain stocks,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Wednesday. “A factor-driven portfolio using screens such as value, momentum and quality can add upside potential as well as diversification benefits.”
Why It's Important
As Rosenbluth notes, the widely followed Russell 1000 Index devotes about a quarter of its weight to technology stocks. Conversely, JPUS had a tech weight of just 10.1 percent as of Aug. 7. Putting JPUS's Facebook immunity into perspective, the fund allocates no more than 0.46 percent of its weight to any of its 508 holdings and Facebook is merely the ETF's 175th-largest component.
In less than three years on the market, JPUS has found a following with investors, as highlighted by the funds nearly $577 million in assets under management.
Another example of a popular multi-factor ETF is the Goldman Sachs ActiveBeta US Large Cap ETF GSLC.
“Like JPUS, GSLC includes value, momentum and quality, but also low volatility screens,” said Rosenbluth.
What's Next
While GSLC's tech weight is more inline with the Russell 1000's than JPUS, the Goldman ETF devotes just 1.5 percent of its weight to Facebook.
CFRA has an Overweight rating on GSLC and a Marketweight rating on JPUS.
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