Putting together a multifactor ETF is kind of like cooking. A recipe using good ingredients in the right proportion yields a tasty dish, while the wrong mix results in a bland concoction. Similarly, the success or failure of multifactor ETFs rests on the components they use and how they’re put together.

Multifactor ETFs are a recent outgrowth of factor-based investing, a focal point for new product introductions for the ETF industry over the last couple of years. In contrast to fundamental valuation techniques, which look at company-specific characteristics such as earnings or cash flow, these ETFs focus on “factors” that drive risk and return such as a company’s value, momentum, size, quality and volatility. As a selling point, sponsors cite academic studies showing that factor-based investing has produced above-benchmark returns over the long term without increasing risk.

The stampede into factor investing started with single-factor ETFs. While studies show some of these products can produce superior risk-adjusted returns over the long term, they can also underperform for long periods and can be highly cyclical. Investors in single-factor ETFs need to determine which factor to use, when to use it and how to rebalance. To further complicate things, the set of economic and market circumstances that prevailed during a successful period for one factor may not prevail again in the future.

Many believe picking the right time to move into or out of a particular factor can be difficult. “At first glance, stand-alone styles may seem to perform better when cheaper,” noted AQR Capital Management’s Cliff Asness in a paper published earlier this year. (His firm offers a series of multifactor mutual funds.) “This is to be expected as value investing has been shown to be ubiquitously effective. But actually implementing a successful contrarian timing strategy is harder in practice. … We prefer value in conjunction with other styles.”

Multifactor ETFs seek to address the potential shortcomings of single-factor strategies by combining several factors simultaneously. Because factors often have a low correlation to one another, and tend to work well or poorly at different times, advocates say a combination of equity factors can enhance diversification and lead to better long-term risk-adjusted returns. And with a rising correlation among asset classes over the last few years, more investors are looking for an added source of diversification, which multifactor ETFs claim to provide.

A study released by Standard & Poor’s earlier this year supports the idea that timing factors is difficult but also that there are merits to packaging multiple factors into one investment. By itself, the factor of “quality”—defined variously as a company’s profitability, earnings quality, asset growth, leverage, etc.—outperformed the S&P 500 98% of the time during all the five-year rolling investment windows between 1994 and 2017. Companies with low volatility outperformed 92% of the time. But value factor investing alone, by contrast, did much worse, outperforming only 45% of the time during those periods while momentum investing outperformed only 48% of the time.

Topping the performance chart, however, was an index that combined all of these factors in equal exposures, which fared as well or better than the best-performing single factor over all time horizons in the study.

It’s important to keep in mind, in any case, that the multifactor ETF world is still developing. The funds in this space offer very short track records (the majority are less than two years old), different methodologies, different combinations of factors and widely varying returns, all of which make comparison shopping for them extraordinarily challenging.

In 2016, the first full year of operation for many of them, returns for the group ranged from about 9% to 13%. Most of the ETFs draw their constituents from common indices such as the S&P 500 or Russell 1000, but their vastly different sector and stock weightings can translate into returns that diverge from those benchmarks. Depending on how they’re constructed, some ETFs track traditional market-cap-weighted benchmarks more closely than others.

Fund providers trace these funds’ track records with historical back-testing, which doesn’t reflect real-world trading issues or data mining. Expense ratios for some multifactor ETFs are at least twice as high as those of many more traditional market-cap-weighted passive exchange-traded products. Some of the ETFs are fairly new and thinly traded, which could increase trading costs.

Yet even with these issues, a growing number of financial advisors are jumping on the multifactor bandwagon, according to Christopher Huemmer, senior investment strategist at FlexShares, which launched one of the first multifactor ETFs in 2011.

“Financial advisors who focus on active management are using multifactor ETFs as core holdings because they provide lower expenses, greater transparency and better tax efficiency than actively managed mutual funds,” Huemmer says. “Passive index investors are pairing them with core holdings for the same reasons.”

Instead of talking about factor investing as a concept, he says, more recent discussions have shifted to matching multifactor ETFs to client goals. For example, because size and value are long-term cycles, the FlexShares Morningstar U.S. Market Factor Tilt Index Fund (TILT), which focuses on both, is a good choice for clients seeking long-term capital appreciation. On the other hand, a more suitable option for someone with a shorter time frame might be the FlexShares Quality Dividend Index Fund (QDF). This ETF focuses on two factors, quality and dividends, that tend to have shorter cycles for moving in and out of favor.

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