Amid market volatility, institutional investors are once again turning to factor-based ETFs to manage risk and returns. Value and momentum exposure, in particular, have long histories of producing excess returns relative to the market.
That’s good news for asset managers with ETFs offering distinctive factor exposures now coming into favor. Investors and advisors like factor-based ETFs because they mitigate risk easily and efficiently.
American Century: Looking Ahead to Rotation
American Century Investment Services is now especially well positioned to capture assets as the market migrates from growth to value. In late 2019 the firm launched a flotilla of Avantis-branded ETFs tilting toward factors it expected to return to center stage. The performance of these actively managed ETFs over the past year has revealed the strength of the offering.
WHAT AMERICAN CENTURY DOES WELL:
Supplying compelling returns
Avantis funds’ mean one-year returns are more than three times better than that of the average of their highly correlated (>90%) peers.
Offering well-compensated risk
The average Sharpe ratio for the Avantis portfolios is four times higher than that of its peer ETFs.
Keeping costs low
The average holding cost for Avantis funds is 40% cheaper than their highly correlated competitors, rivaling the expense of index products.
Providing a truly unique exposure
American Century’s ETF line includes the industry’s only portfolio that offers focused exposure to international small-cap value.
First Trust: Factor Rotation on Autopilot
The First Trust Lunt U.S. Factor Rotation ETF provides exposure to large-cap stocks, shifting assets among four select factors, momentum, value, quality and volatility, as they come into or out of favor. With market-like risk, this ETF has outperformed the S&P 500 on several metrics since its 2018 inception. In particular, the fund has consistently provided positive alpha coefficients and information ratios, the holy grails most often sought by portfolio runners.
WHAT FIRST TRUST PORTFOLIOS DOES WELL:
Taking a different—and effective—approach
First Trust is the only ETF asset manager that relies on relative strength assessments of its target exposures to build a dynamic multifactor portfolio.
Staying nimble
Monthly factor reevaluations allow the portfolio to respond quickly to shifts in the investment terrain. First Trust’s methodology also allows for investment in anti-factor (e.g., low-momentum) exposures, making the portfolio more flexible than conventional funds.
Invesco: Try Sectors on for Size
Investors and advisors anticipating recovery often target certain sectors, e.g., financials, industrials and consumer cyclicals. Smaller companies within those sectors may offer enhanced growth potential as stimulative policies are rolled out.
Invesco offers investors the only family of true, small-cap sector funds. Other sector ETFs may have small-cap biases as artifacts of their selection criteria, but Invesco’s small-cap exposure is intentional. All companies populating the Invesco ETF portfolios are cutouts from the S&P SmallCap 600 Index.
WHAT INVESCO DOES WELL:
Allowing investors to construct a portfolio focused on capturing the small-size premium
Invesco’s array of nine small-cap sector funds allows investors to build top-down or thematic portfolios to capture cyclical trends within market segments.
Giving investors an opportunity to round out sector allocations
Investors can overlay shares of an Invesco small-cap fund on existing sector exposure as a completion tactic to tilt away from large-cap concentration risk.
Keeping costs low
Compared to other sector niche funds, the Invesco ETFs can be held cheaply, making them efficient portfolio add-ons or equitization tools.
