More than three decades have passed since the first ETFs hit the investment landscape. Factor ETFs have long played a key role in helping investors construct portfolios, but are we entering a factor 2.0 era? ETF leaders attending the ETF Exchange conference in Las Vegas this week, including American Century Head of Portfolio Solutions Rene Casis, shared their thoughts on a panel Tuesday.
See more: ETF of the Week: American Century US Quality Value ETF (VALQ)
The panel, hosted by TMX VettaFi Sr. Investment Strategist Cinthia Murphy, also included Franklin Templeton Head of U.S. ETF Product Strategy & Development Todd Mathias and Victory Capital Client Portfolio Manager Michael Mack. With the growing role of active ETFs in the investing landscape, the trio spoke to how rules-based factor funds can set themselves apart.
That growing active ETF world has actually helped factor investing evolve, Casis explained.
“Research has evolved. We’re able to gather insights from active managers and incorporate that through data technology that’s all evolved and able to assist with this evolution,” he said. “Earlier iterations of this were really driven by index providers, and today, active managers are now able to have a say in terms of how these portfolios are constructed, and then work and partner with index providers to build the methodology to run the index.”
Changing Factor ETFs
Murphy asked a question many advisors were likely thinking about factor funds, asking panelists to discuss knowing when to add factor funds without getting into a “market timing” exercise. While factors are highly cyclical, Casis explained, timing the markets remains quite a challenge. Through American Century Investment’s use of what he called “active indexes,” or rules-based index products, that firm aims to provide some degree of balance.
“We’re building something where […] even when growth is pulling back, it allows the investor to remain dedicated to their asset allocation decision,” he said, adding that the firm aims to build a fund that isn’t protected in every regime, but can dynamically adjust volatility to participate on upside or lower risk as needed.
That approach comes through in a fund like the firm’s ETF QGRO. QGRO, the American Century U.S. Quality Growth ETF, charges a 29 basis point fee (bps) to invest in large and midcap firms with a mix of stable and high quality, high-growth firms. That approach has helped the fund return 23.94% over one year as of February 28th per American Century Investments data.
“We were concerned about addressing over concentrations in the market, but also over exuberance of the market, and so, we wanted to build something that had a much more evergreen and much more sustained exposure in one’s portfolio,” he said. “We wanted to do it in a way that was not looking at it through necessarily a factor lens, but really again, integrating what we know about factors, being factor aware, and then adding fundamental models of research to that.”
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