Flourishing Factor ETFs

One of the more prominent themes dating back to 2015 in the world of exchange traded funds is the spate of multi-factor funds coming to market.

Over the years, advisors and investors have become well-acquainted with ETFs that emphasize a single investment factor. For example, it's widely known that this year, low volatility funds are the talk of the ETF universe while quality and value funds are also on the receiving end of investors' adulation. There are also ETFs that isolate the growth and momentum factors, among others.

In its third annual survey of institutional investors and their views on smart beta products, FTSE Russell found professional investors are expected to ratchet up their use of smart beta ETFs. FTSE Russell, one of the largest providers of indexes for use with ETFs, surveyed more than 250 money managers, a combined 80 percent of which manage $1 billion to $10 billion or more than $10 billion. Nearly half of institutional investors surveyed are in North America with a third hailing from Europe.

The most popular smart beta strategy being used by respondents was low volatility (49%), followed by value (41%) and multi-factor combination (37%). However, multi-factor strategies were the most common strategy being evaluated by the asset owners; multifactor indices combined two or more risk premium factors (value, size, quality, momentum, and low volatility). This is understandable as a number of new multi-factor index-based ETFs came to market in 2015 and in the first half of 2016, said S&P Capital IQ in a note out Monday.

The JPMorgan Diversified Return U.S. Equity ETF (NYSE:JPUS) is one of the multi-factor ETFs that came to market last year tracks a FTSE Russell Index. JPUS follows the Russell 1000 Diversified Factor Index.

The Russell 1000 Diversified Factor Index evaluates constituent firms based on attractive relative valuation, quality traits and positive price momentum, according to FTSE Russell, the index's issuer.

The Deutsche X-Trackers Russell 1000 Enhanced Beta (NYSE:DEUS) is another multi-factor ETF following a FTSE Russell benchmark. That ETF debuted in late November and now has $7.7 million in assets under management. DEUS allocates over a third of its combined weight to financial services and consumer discretionary stocks.

DEUS is grounded in long-standing research and thoughtful in the application of value, momentum, quality, size and volatility.

Different exposures are to be expected since criteria used for these indices are distinct. But it can be a challenge for investors to understand what they are getting since it is not spelled out in the name and these ETFs can have vastly different sector weightings, adds S&P Capital IQ.