Factor investing — sometmes referred to as “smart beta” investing — is one of the fiercest battles now being fought among ETF providers. But for investors and advisors alike, it can be a confusing battle, because of widespread disagreement about which strategy is superior.
First, it’s important to understand that diverse factors have been analzyed and debated in academic ciricles. Examples of factor exposures include value, dividend yield, momentum, low volatility, and size.
Let’s examine a few popular factor strategies being used today within the ETF marketplace and compare their recent historical performance.
iShares MSCI USA Momentum Factor (MTUM)
Momentum stocks are typically high growth companies with rising share prices. These are the kinds of stocks that MTUM owns and the strategy is to hold companies with better relative performance compared to out-of-favor companies with lagging share prices.
In the short term, recent performance may persist, but stocks that have outperformed for several years have the tendency to become expensive and offer lower future returns. MTUM owns 125 large and mid-cap stocks with positive upward momentum and the $1 billion fund charges 0.15% annually.
RevenueShares Large Cap Fund (RWL)
As its name implies, RWL is focused strictly on stocks with superior corporate revenue. The fund owns the same 500 stocks within the S&P 500, but rather than weighting stocks by market size it ranks and weights companies according to the companies with the best top line revenue growth.
The fund rebalances its holdings quarterly based upon updated revenue data. RWL’s top three holdings are Wal-Mart, Exxon Mobil and Apple.
The fund has $339 million in assets and charges 0.49% annually.
PowerShares FTSE RAFI US 1000 ETF (PRF)
PRF is best described as a multi-factor ETF that weights its holdings according to fundamental measures of size, including book value, cash flow, sales and dividends, rather than market capitalization. The fund offers broad exposure to U.S. large- and mid-cap stocks.
PRF’s approach tends to give smaller weightings to more-expensive stocks and larger weightings to cheaper stocks than they would receive if they were weighted by simply market capitalization or size. As a result, this fund has a value tilt and its performance will be influenced by how value stocks are performing.
The fund has $4.2 billion under management and charges 0.39% annually.
WisdomTree Total Earnings Fund (EXT)
This ETF follows a fundamentally weighted index that measures the performance of earnings-generating companies within the broad U.S. stock market. To be selected, companies must have generated positive cumulative earnings over their most recent four fiscal quarters prior to the index measurement date.
WisdomTree Investments uses “Core Earnings,” computed by Standard & Poors, as the weighting metric. Core Earnings is a standardized calculation of earnings developed by Standard & Poors designed to include expenses, incomes and activities that reflect the actual profitability of an enterprise’s ongoing operations.