Why Financial Advisors are Using Factor ETFs

ETFs, also known as exchange traded funds, have grown in popularity since their introduction in the 1990s. Financial advisors and portfolio managers have incorporated them as key components of their client portfolios. In some cases, they use ETFs as their main client investment vehicle.

ETFs offer a lot of advantages including relatively low costs, portfolio transparency, tax efficiency, and daily liquidity. ETFs can be the vehicle of choice in some asset classes for advisors looking to provide diversification to client portfolios. Many ETFs are index products, tacking benchmarks such as the S&P 500, the Russell 2000, and a host of other widely followed indexes.

ETFs, also known as exchange traded funds, have grown in popularity since their introduction in the 1990s. Financial advisors and portfolio managers have incorporated them as key components of their client portfolios. In some cases, they use ETFs as their main client investment vehicle.

ETFs offer a lot of advantages including relatively low costs, portfolio transparency, tax efficiency, and daily liquidity. ETFs can be the vehicle of choice in some asset classes for advisors looking to provide diversification to client portfolios. Many ETFs are index products, tacking benchmarks such as the S&P 500, the Russell 2000, and a host of other widely followed indexes.

The rise of factor-based ETFs

In recent years, factor-based ETFs have come onto the scene and gained a following among many advisors. Factor-based ETFs combine all of the benefits of the ETF structure with an investing process based on a benchmark that focuses on a factor or investing characteristic.

Factor-based investing has been steadily increasing among institutional investors according to a 2018 study by Greenwich Associates. Their study showed that 38 percent of existing institutional investors currently using factor-based ETFs planned to boost their allocation to these strategies by 10 percent or more in the coming year. Additionally, 83 percent of the institutions in the study have indicated that they’ve developed a robust understanding of how to incorporate these strategies into their client portfolios, almost double the response from the prior year.

Factors tailor the ETF’s approach

Using factor-based strategies can take index investing to the next level. Examples of factor-based ETF strategies include:

  • Low volatility
  • Quality
  • Size
  • Value
  • Growth
  • Momentum
  • Yield

These and a number of other factors are based on the idea of harvesting certain attributes from a group of stocks and creating a customized index to reflect this approach. For example, an ETF that follows a low volatility approach can take an index and define what constitutes low volatility. They will then create a proprietary index that screens for those characteristics or factors from the stocks in the initial universe. The ETF will invest in those stocks contained in the proprietary index. Typically, these indexes are reconstituted at least annually and rebalanced at set intervals during the year, often quarterly or semi-annually.

Using factors helps financial advisors to tailor their client’s portfolio in the direction they feel best fits the needs of that client. An ETF that focuses on growth as a factor might contain stocks that meet a criteria for increasing their quarterly or annual sales. This type of factor-based ETF might be used in an effort to add return growth to a client portfolio.

Using dividend ETFs in client portfolios

An example of using a factor-based ETF to help tailor a client portfolio towards specific objectives is the use of a dividend ETF such as the Global Beta Smart Income ETF (ticker GBDV).  We believe this factor-based ETF can be used by financial advisors to fine tune their client’s equity allocation.

GBDV tracks the performance of the Global Beta Smart Income Index. The index starts with the stocks that comprise the S&P 900 index1 and screens for the dividend-paying stocks within this universe that have the higher 12-month trailing dividend yields over the previous four quarters. The fund also screens for securities that have recently cut or suspended their divided.  The fund is rebalanced quarterly with a cap of 5 percent of the fund’s value that can be concentrated in a single holding.

Given the initial universe of the S&P 900, the fund offers exposure to both large and mid-cap securities.

GBDV’s SEC dividend yield as of November 30, 2020 was 4.20 percent.  Depending upon the client’s objectives, an advisor can use GBDV to add yield to a client’s portfolio as needed, while maintaining an allocation to large and mid-cap stocks.

View GBDV Prospectus and fund performance here.

The performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted.

Summary

We believe factor-based ETFs are the next generation investment tool for financial advisors in using ETFs to manage their client’s portfolios. These strategies offer advisors the option to fine tune their client’s allocations to help them meet their investing objectives.

1 The S&P 900 combines the S&P 500® and the S&P MidCap 400® to form an investable benchmark for the mid- to large-cap segment of the U.S. equity market. 

No Comments

Sorry, the comment form is closed at this time.