A Nifty Multi-Factor Prints New Highs

There has recently been some scuttlebutt in the world of exchange traded funds about a saturation point being reached for smart beta funds. Due to the proliferation of such funds over the past several years, it's a point worth pondering, but some members of this group continue to deliver for investors.

Among the recent entrant to the smart beta landscape are scores of multi-factor funds, or those ETFs providing exposure to several factors under one roof. The $177.5 million WisdomTree U.S. Multifactor Fund USMF joined that fray almost three years ago and is more of a dual factor play due to its emphasis on quality and value traits.

USMF is up more than 20% year to date and was one of about 200 ETFs hitting all-time highs on Monday, underscoring the points that quality has been a leader factor this year and that value may really be on the mend.

Why It's Important

Traditional value ETFs are usually heavily allocated to the financial services or energy sectors or both, but USMF allocates just 17% of its combined weight to those groups, highlighting the point that it's approach is unique relative to competing funds.

“There are several reasons for certain sectors to be structurally value sectors,” WisdomTree said in a recent note. “The most common justification for cyclicals like Financials, Energy and Materials to trade at lower multiples is that their earnings are closely tied to the business cycle, which increases operating risks. This rationale supports the argument that value stocks outperform because of an associated risk premium, and fits in nicely with the efficient market hypothesis.”

Those three sectors combine for less than 20% of USMF's weight, but technology, not often viewed as a value sector, represents 21.43% of the fund's roster.

“Additionally, as part of the weighting process, the sector weights of the index are scaled to be sector neutral relative to the broader U.S. large-cap equity universe,” WisdomTree said. “As a result, Information Technology is the largest sector weight at 21%. In our view, this process produces an Index that has good representation across sectors, and which relies on stock selection as the driver of alpha instead of on sector tilts.”

What's Next

If value stocks make a credible comeback as some market observers believe is poised to happen, that doesn't necessarily need to happen at the expense of growth. Both factors performing well at the same time would make USMF attractive due to its growthier approach to value, which helps each of the sectors represented in the fund trade at discounts, in some cases large, to the MSCI USA Index.

“Despite its sector neutrality requiring the Index to have a significant weight in 'growthier' sectors, the Index’s discounted valuations in each sector result in it having materially lower overall multiples versus the broader market,” WisdomTree said.

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