Factor ETFs, The New Face of Active Managements

Factor ETF Refresher

By this point, we have all heard about ETFs and how they can be a great addition to your portfolio. What you might not have heard of are Factor or Multifactor ETFs. These are ETF 2.0s. Instead of just investing in the market, you are investing in the market while being able to focus in on specific factors that might lead to higher returns. These factors may give you an edge over just investing in the market.

Factor ETFs vs Active Management

To many, Factor ETFs might seem like active management, and to a certain extent, it is. But factor ETFs are more of a hybrid rather than one of the other. Factor ETFs use specific factors to tilt a portfolio in a particular direction. Vanguard words this edge quite eloquently:

“The better we’ve gotten at understanding what drives active managers’ returns, the less we have attributed to active managers’ stock-selection skills.”

What this means is that you can get active management (or even better) returns for a flat index cost. As an investor, you can take those profits and savings and get yourself a vacation rather than paying for your hedge fund managers 6th vacation house.

To some, this might seem too good to be true, but when you look closer, it makes a lot of sense. The magic of Factor ETFs is that they are bringing algorithmic trading and robo-trading to the mainstream. When you chose a factor, you are telling the ETF to follow a specific guideline when making trades. If for example, you wanted your factor to be “Value” then you would be investing in stocks which are considered cheap, stocks with low P/Es in regards to industry averages. Most active managers are already doing this, using a secret sauce for stock picking and then charging huge management fees for the service. The barrier entry is lower than it ever has been before and less expensive. This might be yet another nail in active management’s coffin.

M3’s Stance

Although Factor ETFs might be the new wave in personal wealth management, guidance is still essential. Picking the right factor and right indexes to invest in can make or break a portfolio. It is vital to work with someone to choose the right Factor ETF for your goals and your risk tolerance. Like anything new, there is a learning curve and especially in a volatile market like the one we have, working with someone who has been trained in investing with Factor ETFs is a necessity. Patience, markets are the driving force, so not all factors are going to perform well in all markets. But if you believe in value, and can be a long-term value investor, then a value factor can provide an active tilt to your equity portfolio. Just be prepared to ride this investment through market cycles and not try to time the market.

At M3 Wealth Advisors, we believe in setting goals then finding the best and most efficient ways to meet those goals. Whether that is using factor ETFs, traditional index funds, or a mixture, we work we work to understand our clients, goals, & risk tolerance and create an asset allocation that matches these. We are fiduciaries, so your goals become ours, it is our job to hold our clients needs above our own. And beyond just saving our clients money in minimizing fees and maximizing returns, we are also there to help when things get a bit rocky. We have had years of low volatility, and that low volatility might be coming to an end. With a rise in volatility can come added risk. Having the right advisor by your side, giving advice and guidance, we can make sure that you are still on track to reach your goals.

Whatever your goals are and whatever your needs might be, all of us at M3 Wealth Advisors are here to help. Click below for a risk-free assessment: