Multi-Factor ETFs Come of Age

Some of the newer members of the rapidly growing smart beta space are multi-factor exchange traded funds (ETFs), or those funds offering investors simultaneous exposure to more than one investment factor. While the largest smart beta funds remain single-factor ETFs, namely growth or value funds, many multi-factor funds are making inroads.

Importantly, 2018 has brought an array of notable milestones for a broad swath of multi-factor ETFs. Specifically, some multi-factor ETFs have reached their landmark three-year anniversary over the past several months. Three years is one of the widely monitored age metrics that fund analysts and investors watch out for.

“In 2018, seven differently constructed multi-factor ETFs will hit their three-year anniversary, as asset managers begin offering a rules-based transparent approach that combines some of the attributes that historically provided active managers with outperformance,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a 2017 note. “These five attributes, or factors, were quality, momentum, value, low volatility, and size.”

On Its Way

One of the multi-factor ETFs that has celebrated its third birthday in 2018 is the JPMorgan Diversified Return U.S. Equity ETF (JPUS). JPUS, which debuted in September 2015, is on its way to becoming one of the titans of the multi-factor universe.

“JPUS tracks an index that aims to deliver higher risk-adjusted returns than a traditional market cap-weighted index through broad diversification of risk across sectors and stocks,” according to JPMorgan Asset Management. “The index uses a multi-factor stock screening process that has historically driven strong performance.”

JPUS has attracted a following among investors. The ETF has about $556 million in assets under management, of which more than $150 million arrived into the fund just this year. JPUS has some stablemates that are also turning three in 2018.

The JPMorgan Diversified Return Emerging Markets Equity ETF (JPEM) turned three in January while the JPMorgan Diversified Return International Equity ETF (JPIN) turned three in November of 2017. JPIN is on a torrid pace of asset gathering that has seen its assets under management tally jump to $1.43 billion on the back of 2017 inflows of $526.4 million. Proving that the three-year milestone is significant, JPIN turned three in the fourth quarter of last year and had fourth-quarter inflows north of $124 million.

JPIN was up more than 25% in 2017, topping the MSCI EAFE Index by more than 100 basis points, although it has fallen by more than 10% YTD.

Another U.S. Idea

Investors looking for another multi-factor approach to U.S. large-caps can consider the Deutsche Xtrackers Russell 1000 Comprehensive Factor ETF (DEUS). DEUS turns three in November 2018.

“With its 19.1% total return, DEUS also outperformed the average large-cap core mutual fund year-to-date through December 1,” said Rosenbluth, referring to 2017 performance. “DEUS includes five factors, which contrasts with peers that typically include three or four of them.”