Factor investing has come a long way from the nascent days in the mid-2000s when just a few ETFs were linked to the strategy.

Today, major ETF firms like Invesco, State Street Global Advisors and others offer a bevy of factor ETF choices.

ETFs linked to factors like value, low beta and momentum are investing strategies that provide clients with an opportunity to overweight areas of the market that are doing best while reducing exposure to the areas that aren’t.

With the current backdrop of high inflation, rising interest rates and compressing stock market valuations, let’s examine the factor ETFs that financial advisors should be watching.

Vanguard U.S. Value Factor ETF (VFVA)
With stock market valuations still compressing, market sentiment is favoring stocks that are cheaper versus the broader market. That’s helped lift the performance of value oriented funds like the Vanguard U.S. Value Factor ETF (VFVA).

Over the past year, VFVA has risen 2.84% which has beaten the SPDR S&P 500 ETF (SPY) by an impressive 11.33%.* Moreover, VFVA’s strategy of overweighting stocks with lower book values and forward price earnings ratios has outperformed nearly all other factor strategies, including the formerly invincible growth investing strategy.

Put another way, value is back and after many years of underperformance, it could be a good place to allocate.

AAM S&P 500 High Dividend Value ETF (SPDV)
The AAM S&P 500 High Dividend Value ETF (SPDV) puts a fresh spin on value investing by adding a meaningful dimension that’s becoming increasing important to clients: cash flow.

Unlike many dividend focused ETFs, which often become concentrated in just a few high yielding sectors, SPDV provides a more diversified strategy. The fund’s indexing method targets five stocks from each Global Industry Classification Standard (GICS) sector. This nifty design has the potential for a fuller range of sustainable dividend opportunities across many different industries.

SPDV distributes dividend income monthly and charges a modest expense ratio of 0.29%

AXS Astoria Inflation Sensitive ETF (PPI)
Aside from style factors, which capture returns and risk within an asset class, macroeconomic factors are designed to capture broad risk across asset classes. Macroeconomic factors can include things like credit risk, interest rates and liquidity.

Inflation hedged ETFs like the AXS Astoria Inflation Sensitive ETF (PPI) are among this latter group of macroeconomic focused funds.

PPI employs a unique multi-asset class approach to fighting inflation. The fund has the flexibility to invest in equities along with commodities and inflation protected bonds like TIPS.

Invesco S&P 500 Low Volatility ETF (SPLV)
If you’re on a rollercoaster, you presumably don’t mind being whipsawed. If you’re an investor, it’s not desirable.

The Invesco S&P 500 Low Volatility ETF (SPLV) aims to dampen market ups and downs by owning the 100 stocks within the S&P 500 with the lowest realized volatility over the past 12 months. Currently, defensive industries like consumer staples and utilities account for almost half of the SPLV’s industry sector exposure.

Another benefit of using volatility dampening funds like SPLV is they keep clients disciplined and invested in the market versus in panic-selling into cash.

Summary
Factor premiums can show up at different moments and in different places within the stock market. As such, astute advisors aim to keep clients diversified across the entire factor spectrum in order to capture the premium when it's there.

*Market performance is through Aug. 29.