{"id":1108,"date":"2020-01-16T15:52:17","date_gmt":"2020-01-16T20:52:17","guid":{"rendered":"https:\/\/www.etfrc.com\/articles\/?p=1108"},"modified":"2020-01-17T14:18:10","modified_gmt":"2020-01-17T19:18:10","slug":"evaluating-factor-etfs","status":"publish","type":"post","link":"https:\/\/www.etfrc.com\/articles\/index.php\/2020\/01\/16\/evaluating-factor-etfs\/","title":{"rendered":"Evaluating Factor ETFs"},"content":{"rendered":"\n

Factor investing is a widely used investment strategy that seeks stocks with certain desirable characteristics in the belief that these will lead to superior returns over time. Six widely recognized factors are Size (i.e., market cap), Value, Yield, Momentum, Quality and Volatility. <\/p>\n\n\n\n

Naturally, there\u2019s an ETF for that! Issuers offer dozens of funds using one or more factor strategies. Unfortunately, factors aren\u2019t always easily defined, so evaluating these funds and comparing competing funds from different issuers can be challenging.<\/p>\n\n\n\n

What exactly constitutes \u201cValue\u201d or \u201cQuality\u201d? Differences between index providers in how they select stocks for inclusion in a particular factor fund can result in very different fund compositions. For example, the iShares MSCI USA Quality Factor ETF (QUAL<\/a>) has only 46% overlap with the Invesco S&P 500 Quality ETF (SPHQ<\/a>). Even where there are generally accepted definitions such as with Volatility, differences in measurement time frames or selection universe result in rather divergent portfolios. <\/p>\n\n\n\n

Our new Factor Scorecard helps investors evaluate and compare funds by establishing consistent and we believe non-controversial, \u201cmiddle-of-the-road\u201d definitions for each factor, and then ranking an ETF\u2019s factor score against all other ETFs in the same broad category. (Our equity fund categories are U.S., International, Emerging Market and Global equities). <\/p>\n\n\n\n

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Our Factor Scorecard appears near the top of every equity Fund Focus page<\/figcaption><\/figure>\n\n\n\n

Rankings reflect each fund\u2019s percentile rank within its category\u2019s normally distributed range of values for a given factor. Our definitions for each factor are described below.<\/p>\n\n\n\n

Size<\/strong><\/p>\n\n\n\n

Based on the weighted-average market cap (WAMC) for the underlying constituents, the graph for the Size Factor is broken into three equal buckets for Small Cap (<$2 billion), Mid Cap ($2-10 billion) and Large Cap (>$10 billion) stocks, with the upper-bound of the Large Cap being the largest WAMC for that category. The specific value shown on the graph corresponds to the appropriate market cap bucket and the ETF\u2019s WAMC as a percentage of that bucket\u2019s range.<\/p>\n\n\n\n

As an example, an ETF with a WAMC of $6 billion\u2014in the middle of the $2-10 billion range of the middle bucket (mid-caps), would be shown as 50% on the Size Factor graph. <\/p>\n\n\n\n

Value<\/strong><\/p>\n\n\n\n

An equally-weighted ranking of the four major valuation multiples: price-to-earnings (P\/E), price-to-sales (P\/S), price-to-book value (P\/BV) and price-to-cash flow (P\/CF), each using the forecast figure for the next 12 months. These rankings are calculated in inverse order, since lower multiples imply more \u201cvalue.\u201d<\/p>\n\n\n\n

Yield<\/strong><\/p>\n\n\n\n

Dividend yield based on the 12 month forward dividends per share (DPS) forecast for an ETF, ranked against all other funds in the category.<\/p>\n\n\n\n

Momentum<\/strong><\/p>\n\n\n\n

Six-month total returns, ranked against all other funds in the category. Some Momentum ETFs may measure a longer or shorter period, or measure momentum among a more narrow universe, and therefore may not rank very highly under our definition. Regardless, users can easily compare returns between any two funds over any time period they wish on the \u2018Performance\u2019 tab of any ETF\u2019s \u201cFund Focus\u201d page (ex: MTUM<\/a>). <\/p>\n\n\n\n

Volatility<\/strong><\/p>\n\n\n\n

Six-month annualized statistical volatility, ranked against all other funds in the category. A low ranking is \u201cgood\u201d since low <\/em>volatility is the investment factor being sought. <\/p>\n\n\n\n

Quality<\/strong><\/p>\n\n\n\n

An equally-weighted ranking of three\nmeasures of quality:<\/p>\n\n\n\n