With equity markets notching forgettable showings in 2022, it’s understandable that some investors are ignoring plain vanilla and other equity weighting methodologies, but this tumultuous environment may also be a good time for market participants to consider select multifactor exchange traded funds in the event stocks rebound.
One of the names meriting evaluation is the WisdomTree U.S. Multifactor Fund USMF. The $212.8 million USMF is more than five years and lives up to its multifactor billing as it focuses on value and quality – the fundamental sleeve – and momentum and correlation – the technical sleeve.
As highlighted by USMF, multifactor ETFs provide exposure to more than one investment factor, which can be a winning strategy when stocks are moving higher because factor timing is almost as difficult as stock picking or broader market timing. That is to say, an ETF like USMF eliminates the need to pick a single investment factor while getting the timing correct.
USMF’s methodology expands upon that concept, encompassing four images, as noted above. As such, there is some exclusivity with this portfolio.
“Rather than build distinct sleeves, USMF targets the stocks with the best combination of its four preferred factors: value, quality, momentum, and correlation. It admits only 200 companies and weights them by a blend of their factor exposure and inverse volatility. The fund also pins its sector composition to the broad U.S. market and caps each firm’s weight at 4% of the portfolio,” writes Morningstar analyst Ryan Jackson.
Investors are right to question whether or not multifactor ETFs deliver out-performance relative to comparable strategies. Year-to-date, USMF is performing in line with the S&P 500 Value Index while easily outpacing the S&P 500 and Russell 1000 Index. Over the past three years, the WisdomTree ETF handily topped the value benchmark and comparable indexes, often with less annualized volatility.
That’s impressive, considering that USMF allocates 27% of its weight to technology, which is one of the most badly beaten sectors this year.
“Momentum exposure has been solid. And perhaps most notably, the fund strikes a very defensive stance—the product of inverse volatility weighting and the correlation factor, which favors stocks that ebb when the market flows. That posture helped the fund rank within the top 15% of its category peers for the year to date through August,” adds Jackson.
Morningstar has a “silver” rating on the WisdomTree ETF.
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