Market Overview

A Multi-Factor ETF Is Coming Of Age

A Multi-Factor ETF Is Coming Of Age

Scores of multi-factor exchange-traded funds have debuted over the past several years. One of the newer additions to that fray is the WisdomTree U.S. Multifactor Fund (CBOE: USMF), which turns one year old at the end of the second quarter.

While many multi-factor ETFs opt to focus on more than two fundamental factors, such as growth, low volatility, value and others, USMF takes a different approach. The ETF tracks the WisdomTree U.S. Multifactor Index, which emphasizes two fundamental factors along with a pair of technical factors.

What Happened

Since coming to market in late June 2017, USMF has outperformed broader U.S. equity benchmarks. The S&P 500 and Russell 1000 Index are up an average of 10.5 percent since USMF debuted, but the WisdomTree fund is higher by 13.9 percent since inception.

Impressively, USMF has delivered solid performance without exposure to some of the stocks that have surged since the ETF debuted. USMF doesn't feature exposure to Inc. (NASDAQ: AMZN), Microsoft Corporation (NASDAQ: MSFT) or Netflix, Inc. (NASDAQ: NFLX).

“From January 26 to April 30 (the time of this writing), volatility re-entered the market, allowing USMF’s methodology to kick it into the next gear,” said WisdomTree in a recent note. “Over this volatile period, USMF added more than 300 basis points (bps) of excess total return versus the S&P 500.”

Why It's Important

The fundamental factors emphasized in USMF are value and quality. Focusing on value, it may not be surprising that the ETF doesn't feature exposure to Amazon or Netflix. The ETF's technical factors are momentum and correlation.

Although USMF lacks FAANG exposure, the ETF's largest sector is technology at 23.58 percent. The ETF, which holds nearly 200 stocks, devotes 28.58 percent of its combined weight to financial services and healthcare stocks. None of USMF's components garner weights above 1.45 percent.

What's Next

USMF's active share is another element investors should consider. Active share measures how closely a fund tracks a benchmark based on its components and the weights assigned to those stocks. So if a fund is trying to beat the S&P 500, but has zero percent active share, it will produce performances inline with the benchmark. Said another way, USMF's high active share can be advantageous for investors.

“USMF’s high active share allows fundamentals critical to managing valuation risk and improving on quality to diverge meaningfully from the S&P 500,” said WisdomTree.

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