Factor ETFs
This is what factor ETFs offer
Factor investing is based on the premise that stock picking based on various factors such as value, quality, momentum and minimum volatility can outperform a traditional benchmark over the long term. With conventional indices, the stocks are weighted according to their market capitalization in order to reflect the market development, the so-called beta. In contrast, ETFs that use factor investing aim to improve investment success through the use of factors and to achieve better risk-adjusted performance in the long term than the pure market benchmark. With the value factor, for example, investments are made in stocks that are based on fundamental data such as the price/earnings ratio1 or price-to-book ratio2 are considered undervalued. In contrast, with minimum volatility strategies, stocks are selected with regard to the lowest index price fluctuation. In addition, dividend and small-cap stocks (the so-called “size” factor) strategies can also be regarded as stock factors, because the index members are also selected according to a special style here. Equally weighted equity indices are a special feature; here it is much more about an alternative weighting with the aim of achieving better risk diversification in the index than the benchmark.
Different development in different market phases
Since the factors develop differently in different market phases, it can be interesting for investors to set corresponding priorities with certain factor funds. For example, in a scenario with rising inflation and rising economic growth, the factors of minimum volatility3 and value4 suitable. Conversely, when inflation was falling, value and momentum were down5 tend to be preferable. The historically low to negative correlation is also important6 of returns among each other, which is why a dynamic combination of factors can improve risk diversification in the portfolio.
Country and sector ETFs have been known to many investors for some time. Factor ETFs offer another way of spreading risk in a portfolio. They are therefore establishing themselves in the long term as an important building block in portfolio construction. By using factor ETFs, investors also have the advantage that they can flexibly put together an individual portfolio from various factors, depending on the market assessment and risk appetite.
What needs to be considered?
Even if the long-term aim is to achieve a higher return than classic market benchmarks, this cannot be achieved in every market phase. Investors should therefore note that there can also be phases in which certain factors develop worse than the broader market. Although factor indices are broad in scope, they use quantitative7 and fundamental approaches8th, which significantly increase the complexity of such products compared to benchmark indices. This complexity and transparency varies in particular depending on the fund provider. DWS works primarily with the index provider MSCI on factor indices in order to offer a high degree of transparency and representativeness. In general, however, factor ETFs are only suitable for investors who have a well-developed understanding of the financial markets and fundamental analysis.
DWS offers a wide range of stock ETFs on different factors, with different geographic focuses. For the European stock market, for example, ETFs are based on the factors Value9minimum volatility10 (for example Xtrackers MSCI Europe Value UCITS ETF) and small caps11 offered. For the global stock market, DWS Investments offers the minimum volatility factors12momentum13Quality14 and value15 on (for example MSCI World Minimum Volatility UCITS ETF), as well as various dividends16-ETFs.
Further information can be found at xtrackers.de
1“P/E” for short. Ratio that compares the current price of the stock to the earnings per share determined or expected over a specific period of time.
2“KBV” for short. Ratio that puts the price of a share in relation to the balance sheet book value of a company per share.
3Factor that selects stocks based on their price fluctuations.
4Factor that selects stocks based on their value or valuation.
5Factor that selects stocks based on their price development over a certain period of time.
6Strength of synchronization of the prices of different securities.
7Quantitative approaches use large amounts of data and mathematical formulas to select stocks.
8thFundamental approaches place company key figures at the center of the file selection.
9Factor that selects stocks based on their market valuation.
10Factor that selects stocks based on their price fluctuations.
11Stocks of small and medium-sized companies.
12Factor that selects stocks based on their price fluctuations.
13 Factor that selects stocks based on their price development over a certain period of time.
14Factor that selects stocks based on specific quality criteria.
15Factor that selects stocks based on their intrinsic value.
16Distribution of profits from companies to their shareholders (shareholders)