ETF Trends CEO Tom Lydon discussed the IQ Chaikin U.S. Small Cap ETF (CSML) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
CSML seeks investment results that track, before fees and expenses, the price and yield performance of the NASDAQ Chaikin Power U.S. Small Cap Index. The NASDAQ Chaikin Power U.S. Small Cap Index is a rules-based, quantitative index designed to enhance an existing index (NASDAQ US 1500 Index) by selecting stocks with the highest Chaikin Power Gauge rating. The Index rebalances and reconstitutes annually and typically consists of 200 to 350 equally weighted securities.
One way to enhance a portfolio is by capitalizing on factor premiums. After a strong market run-up, investors may consider a multi-factor play to diminish potential risks ahead and better-diversify an investment portfolio. It may be prudent to incorporate a smart beta or factor-based investment strategy that implements academically-proven strategies in an efficient and easy-to-use ETF wrapper.
A factor can be considered as any characteristic relating to a group of securities that can help explain their risk and return. Some of the most common factors that have been identified historically are size, value, quality, momentum, and volatility. Advisors view smart beta as fitting best with domestic U.S. equities, with most using smart beta to provide alpha, improve diversification, manage volatility, provide exposure to specific strategies, or act as a good fit with a value proposition.
A Multi-Factor Approach
Multi-factor approaches can help overcome single-factor shortcomings. The single-factor approach may come with its own limitations. Single factors have been highly cyclical from year to year.
On the other hand, investors look to combined multi-factor strategies to create a more diversified solution and potentially enhance returns over time. Additionally, most factor returns are generally not highly correlated, so combining them is a great way to diversify a portfolio.
The Chaikin Power Gauge tool allows investors access to detailed transparency on securities that make up the broader market. It’s a multi-factor stock selection tool that may help create a more diversified solution to potentially enhance returns over time. Plus, it combines fundamentals and technicals to simplify stock selection, as well as its four primary factors, value, growth, technical, and sentiment.
The value factor includes screens like long-term debt-to-equity ratios, price-to-book value, return on equity, price-to-sales ratio, and free cash flow. Technical factors cover price trend, price trend rate of change, relative strength vs. market, and volume trend. Growth factors include earnings growth, earnings surprise, earnings trend, projected P/E ratio, and earnings consistency. Lastly, the sentiment factor screens for earnings estimate trend, short interest, insider activity, analyst ratings, and industry relative strength.
Listen to the full podcast episode on CSML:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.