Demand for strategic beta ETFs has been rising among RIAs and independent broker-dealers as either a complement or alternative to active management strategies to reduce portfolio risks and amplify returns, in that order, says John Feyerer, director of equity product strategy at PowerShares, Invesco’s ETF division.
With interest rates expected to rise this year along with a stronger economy, strategic beta ETFs focusing on value and size (market cap) factors should perform well, says Feyerer, who participated in a recent conference call sponsored by Schwab ETF OneSource.
Tony Davidow, alternative beta and asset allocation strategist at the Schwab Center for Financial Research, agrees that a “value tilting” will do well this year, as well as fundamental smart beta strategies, which assign the heaviest weights to securities based on factors such as sales, cash flow, dividends and buybacks.
Advisors can choose strategic ETFs that focus on one of these other single factors, depending on the overall risk and performance appetite of their clients, or choose a multi-factor ETF instead.
A multi-factor ETF provides a broad allocation of assets, but a single-factor ETF has the potential to yield higher returns, adding more alpha as well as more risk, according to Mike Akins, head of ETFs at ALPS, the fourth largest distributor of ETFs in the U.S.
One way to hedge that risk, says Akins, is to pair two different single-factor ETFs that are negatively correlated for excess returns, which are returns above a benchmark index. They are likely to move in opposite directions.