In factor investing with ETFs, the sum may be more than the parts.
To be sure, single-factor exchange traded funds have dominated recently. Specifically, strategies to smooth the ride in a bumpy stock market.
Investors have poured $5.28 billion in new money into iShares Edge MSCI Minimum Volatility USA (USMV) so far this year — or more than a third of the $12.97 billion in assets that it holds. That’s made it the No. 1 equity ETF in terms of net inflow.
However, the average investor may not fully grasp the risk-reward trade-off tied to single factors, says Rob Nestor, head of iShares smart beta.
Low volatility ETFs tend to underperform in market rallies, taking away from their returns over a full market cycle. An investor seeking to beat the market may end up feeling short-changed.
Even concentrated exposure to the value factor may be less safe than an investor might imagine.