Disclaimer: No investment advice or recommendation, this article is for information purposes only. Before you decide on an ETF, take a closer look at it in terms of positions, sampling, regions, etc. I can't describe everything here as it would go beyond the scope of this article.
Part 1 (Definition, Categories
& Z-score and quality factor): https://getqu.in/RCSY4a/
Part 2 (Value ETF): https://getqu.in/Nfnhqb/
Part 3 (Low Volatility ETF): https://getqu.in/Ub7KpG/
Part 4 (Momentum ETF): https://getqu.in/CNMgGw
Part 5 (Small- and Growth ETF): https://getqu.in/0NoqmW/
Part 6 (Dividend ETF): https://getqu.in/NJtoF5/
What are multi-factor ETFs?
As the name suggests, multi-factor ETFs contain several tilts and are therefore not pure plays on certain factors. The theoretical foundation here is also the CAPM/French Fama model, according to which the expected stock return is expressed by premiums: Volatility, Size & Value. Multi-factor ETFs use several of these factors to outperform their respective parent index (or to achieve low risk). By combining different factors, this form of ETF is more active than the smart beta factors previously considered.
Historical returns
It is not really possible to say whether outperformance can really be achieved due to the limited data currently available. Many of these ETFs have only been around for a few years. A comprehensive study of multi-factor ETFs to date concludes that multi-factor ETFs have underperformed both the US and global markets (while down-side protection paints a mixed picture). Study:
https://pmc.ncbi.nlm.nih.gov/articles/PMC10225753/
However, in my opinion, no general conclusion can be drawn here, as we have already seen in previous parts that the individual factors such as size, volatility and dividends have underperformed in the recent past. It is therefore only logical that the multi-factor approach has also underperformed in the recent past.
👉Multifactor-ETFs:
$HWWA (-0.15%) (World | TER 0.25 % | TD n.A. | 1.3 bn Invested Vol. | 3Y underperformance vs. All-World -0.2% ppt. | 5Y underperformance -0.2%pt. | 10Y underperformance -14 %pt.)
Index methodology: Relevant stocks are identified from the parent index (MSCI All Country World Index) using the following factor weightings:
(1) Value: low kgv/kbv , high dividend yield is preferred
(2) Quality: stable earnings high return on equity
(3) Momentum: shares that have shown above-average price performance in the recent past are preferred
(4) Low risk: stocks with lower volatility than the overall market are preferred
(5) Size: Smaller companies (small caps) with potential for above-average growth are preferred.
- The fund may invest up to 10% of its assets in derivatives such as total return swaps and contracts for difference.
$IBCZ (-0.07%) (World | TER 0.50 % | TD 0.31 %.| EUR 0.5 bn invested. | 3Y underperformance vs. All-World - 4%pt. | 5Y underperformance - 11 %pt | 10Y underperformance - 34%pt.)
- Index methodology: Focus on Value, Momentum, Quality & Size (Small Cap). The aim is to achieve a similar risk profile to the All-World. The factors are weighted and risk rated using MSCI's "Barra Equity Model". This uses over 40 data metrics for each share and provides a value-at-risk figure for each share, among other things. The focus factors are used to determine a weighting for the positions, which are then adjusted on the basis of risk measures, e.g. country and sector weightings may not deviate from the starting index by more than 5%.
$GERD (+0.04%) (World | TER 0.5 % | TD n.a. | 0.4 bn invested vol. | 1Y underperformance vs. All-World -5%pt.)
- Index methodology: Gerd Kommer's index should not be omitted here for reasons of respect for his performance alone. In addition to size, momentum, value & quality, country weightings of 50% by GDP and 50% by market capitalization are also applied here, as well as minor gimmicks such as the exclusion of stocks around the IPO period and in the case of high short interest. Dedicated analysis: https://www.youtube.com/watch?v=3IWp5OHn4Ps
$FEX (US | TER 0.65 % | TD n.a. | EUR 0.2 bn invested volume | 3Y underperformance vs. S&P 500 - 13 %pt. | 5Y underperformance - 30 %pt. | 10Y underperformance vs. S&P 500 - 134 %pt.)
- Index Methodology: Mix of growth and value factors. Growth factors: Momentum (3, 6 & 12 month price increases), sales multiple, 1 year sales growth. Value factors: Price to book ratio, cash flow to price ratio, return on equity. Valuation of shares from the parent index (Nasdaq US Large Cap 500) based on these factors, allocation & weighting according to quintiles, top quintile approx. 33% weighting, 2nd quintile 27%, etc. Quarterly reweighting
$IBC0 (+0.11%) (Europe | TER 0.45 % | TD 0.22 % | EUR 0.2 bn invest vol. | 3Y outperformance vs. EuroStoxx 600 + 2%pt. | 5Y outperformance + 6 %pt. | 10Y outperformance + 8 %pt.)
- Index methodology: the "Barra Equity Model" is used to select a factor from the parent index (MSCI Europe Index for large and mid-caps) via the factors: value, momentum, quality
Conclusion - what remains?
Multi-factor ETFs try to achieve an edge over the parent index by combining various factors, true to the motto: a lot helps a lot, the shares are screened according to various factors such as size, value, momentum etc. in order to achieve a higher return with the same or lower quality with this "egg-laying wool-milk sow". However, precisely this complexity can also be a disadvantage, as screening according to many factors can mean that some factors influence each other and are therefore not as highly weighted in the index.
Unfortunately, the data is not yet sufficient to make a statement about the investment case of these multi-factor ETFs, but the short-term returns over the past 10 years have lagged behind those of the parent indices (as the individual factors have often performed worse).
#smartbeta
#multifactor
#etf
