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A New Dynamic Approach To Multi-Factor ETFs

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A New Dynamic Approach To Multi-Factor ETFs

Mutli-factor exchange-traded funds are evolving as issuers find new avenues for providing simultaneous exposure to multiple investment factors.

The Global X Adaptive U.S. Factor ETF (NYSE: AUSF), which debuted Tuesday, is one example of the evolving multi-factor ETF landscape.

What Happened

Some multi-factor ETFs provide exposure to three factors. Others feature four factors or more. AUSF focuses on the value, momentum and minimum volatility factors.

The new tracks the Adaptive Wealth Strategies U.S. Factor Index, which is comprised of sub-indexes featuring 100 stocks apiece displaying traits of the aforementioned factors.

“At any given time, the index accesses two factors, equally weighted, or all three factors with a weighting of 40%-40%-20%, underweight or eliminating the most recent outperforming factor to protect against potential downside and manage risk more effectively,” according to a statement from New York-based Global X.

Why It's Important

By embracing a multi-factor ETF, particularly one such as AUSF that dynamically allocates across factors, investors can realize efficiencies not available from moving in and out of single factor funds. Interestingly, AUSF's methodology includes eliminating the best-performing factor as a mean-reversion tactic.

“This hits at the heart of our philosophy: mean-reversion. Factors are cyclical, and factor performance can become stretched,” said Kris Carroll of Adaptive Wealth Strategies. “Many advisors can point to times when momentum became too far stretched to the upside after the investment herd bought in.”

From year to year, factor leaders and laggards differ and investors have a tendency to gravitate toward the best-performing factors just as those factors are primed to revert to the mean.

What's Next

AUSF debuted with 26.25 percent weight to financial services stocks and a combined weight of over 24 percent to industrial and real estate sectors. Conversely, the fund's combined weight to consumer discretionary and technology stocks is just over 14 percent, indicating the new ETF may have debuted with larger tilts to low volatility and value stocks over momentum fare.

None of AUSF's holdings exceed a weight of 2.06 percent. The new ETF charges 0.27 percent per year, or $27 on a $10,000 investment.

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