Why invest in Single Factor Strategy ETF’s?
Factor Investing has been around for many decades, but with ETF wrapper it has become accessible to many retail clients. The traditional approach to buying a diversified basket of assets in hope that their low /non correlation will protect the investor in times of market decline has been broken as witnessed recently during financial meltdown of 2007-2009. On the other hand Factor Investing helps the investor in understanding the main drivers of return. By choosing these factors the investor can potentially achieve a higher risk-adjusted return.
Single Factor ETF’s or Factor ETF’s use factors such as size, quality , low volatility, momentum , to screen out the companies from the stock universe to construct rules- based index rather than just the market capitalization weighted methods.
Some factors have shown a superior risk-adjusted performance over time. One thing to watch when investing in specific factors is their cyclicality.