A multifactor ETF is a solution for advisors looking to mitigate volatility and take smarter risk in client portfolios.
Uncertainty around sticky inflation, Fed rate hikes, and the possibility of a recession has weighed on markets. The expected volatility ahead has kept many investors on the sidelines; however, a multifactor ETF offers a more balanced risk-factor exposure, and the potential for enhanced returns.
The Hartford Multifactor US Equity ETF (ROUS ) is a multifactor U.S. equity ETF designed to offer potentially less volatility than traditional cap- weighted indices over a full market cycle,
Charging 19 basis points, ROUS is a cost-effective way to access quality, defensive-value U.S. equities. ROUS seeks its goal with an approach focused on lower valuations, lower volatility, and lower concentration.
Lower Valuations Offer Greater Upside Potential
Investing in companies with lower valuations offers greater upside opportunity. ROUS aims to invest in stocks with lower valuations than the Russell 1000 Index. As of the end of March, the price-to-earnings-ratio for ROUS was 15.4, a 25% discount to the P/E ratio of 20.4 for the Russell 1000, according to Hartford Funds.
ROUS’s underlying index focuses on high quality stocks and seeks to avoid value traps by screening securities based on their composite factor scores. The composite factor score focuses on value (50%), momentum (30%), and quality (20%).
Lower Volatility May Enhance Returns
ROUS seeks to reduce volatility by up to 15% over a full market cycle while maintaining strong fundamentals. Nearly 75% of ROUS’s holdings demonstrate lower volatility than the Russell 1000 Index. ROUS has a beta of 0.86 since 2019, as of March 31.
The fund utilizes a covariance-optimization tool to assemble and weight companies as part of the fund’s portfolio construction process. The process combines companies with favorable factor scores in a way that allows them to behave independently, enhancing diversification, according to the firm.
Notably, portfolios that achieve lower volatility through covariance optimization have the potential to enhance returns through a market cycle.
Lower Concentration Improves Diversification
ROUS reduces concentration at the sector, market cap, and individual holding levels, enhancing diversification. The fund limits a single stock’s weight to 1.5% of the portfolio.
Investors in the Russell 1000 are largely exposed to just a handful of names, as 26% of the Russell 1000 by weight is in the top 10 constituents. Conversely, just 11% of ROUS by weight is in the top 10 holdings.
ROUS’s lower concentration provides greater exposure to mid-cap stocks, effectively limiting exposure to mega-cap stocks, which tend to have a disproportionately high impact on cap-weight indexes.
For more news, information, and analysis, visit the Multifactor Channel.
