Market Overview

Factor Fun With This ETF


So many investment factors, so little time, but at least an increasing number of strategic beta exchange traded funds try to do investors a solid by employing multiple factors under the umbrella of one ETF.

Put the iShares FactorSelect MSCI USA ETF (NYSE: LRGF) in that category. The ETF, which turns a year old next month, follows the MSCI USA Diversified Multiple-Factor Index. LRGF holds large- and mid-cap stocks. Since coming to market, the ETF is off 4.6 percent, a decline that nearly mirrors that of the S&P 500 over the same stretch.

LRGF is not all-encompassing when it comes to the investment factors represented within the ETF. For example, low volatility is not directly part of the ETF's objectives. However, the fund does expose investors to the momentum, quality, size and value factors. That is an approach that, over time, could bear fruit for investors because timing when one factor will outperform is a futile endeavor.

LRGF “also attempts to offer sector-neutral exposure to the quality factor. It targets stocks with high return on equity, low debt/equity, and low earnings-growth variability relative to their sector peers. While this approach does not narrowly focus on profitability, it skews the portfolio toward more-profitable names,” said Morningstar in a recent note.

LRGF's underlying index imposes sector and individual security tilts in an effort to further diminish risk. Home to 140 stocks, LRGF allocates no more than 2.6 percent of its weight to any single name. The ETF's largest holding is TJX Inc. (NYSE: TJX) followed by Gilead Sciences Inc. (NASDAQ: GILD).

Healthcare is the ETF's largest sector allocation at 20.6 percent. Financial services, the second-largest sector weight in the S&P 500, is LRGF's second-largest sector weight at 18.8 percent. Telecom, materials and energy names combine for less than 10 percent of LRGF's lineup.

“Back-tested performance data suggest that the fund's multifactor index would have slightly outpaced the simple average return of the four indexes that iShares' individual factor ETFs track. There are some minor differences between the construction methodology of the individual factor indexes and the multifactor index that could distort this comparison. However, LRGF's holistic approach to portfolio construction may offer some real (albeit modest) return advantages. For example, stocks that are both cheap and profitable may offer higher expected returns than stocks with only one of those characteristics,” adds Morningstar.


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