ETF provider WisdomTree has launched the WisdomTree US Multifactor UCITS ETF on the London Stock Exchange. The fund seeks to track the price and yield performance of the WisdomTree US Multifactor Index and has a net expense ratio of 0.30 per cent.
The firm writes that with the availability of an ever-greater amount of smart beta strategies, investors today can access individual factors associated with historical market-beating performance at fairly low cost. However, while it is now much easier to pick and choose factor exposures, it hasn’t gotten any easier to know which factor might perform strongly ahead of time. The true benefit of multi-factor strategies lies in diversifying factor exposures so that the risk of being in the worst-performing factor at the worst time is mitigated, thereby ensuring exposure across all of the factors at all times.
Christopher Gannatti, WisdomTree Head of Research in Europe says: “Diversification is about minimising the risk of severe underperformance over a given time period. Many investors in US equities have watched the outperformance of momentum-focused strategies in the past few years. Instead of requiring them to decide if they want to chase this strategy or try to select the next factor poised for outperformance, WisdomTree’s multi-factor approach ensures some exposure to momentum while also diversifying across other factors which may outperform in the coming periods.
“In the WisdomTree US Multifactor Index, each constituent is screened across all factors on a quarterly basis, helping to ensure that the strategy’s factor diversification is maintained. For those clients who don’t believe that they can add value by timing factors and don’t want to risk being overweight in the wrong factor at the wrong time, this provides a potential solution,” he says.
Rafi Aviav, WisdomTree Head of Product Development in Europe, says: “While there is room for multi-factor strategies that offer a near-market experience and try to keep a very low tracking error with respect to their benchmark, USMF takes a different approach. It packages a high active share portfolio with significant factor exposures that are well balanced across the leading equity risk factors. Our high active share is achieved despite the strategy’s sector-neutrality, which ensures excess returns are consistently and purely driven by the strategy’s stock selection.
“Furthermore, the factor exposures are pronounced and well-balanced across the leading risk factors, as opposed to many offerings which overload on value or momentum or have faint exposures across all factors. This all combines to makes the strategy’s added value potent, transparent and fee-efficient.”
“We believe USMF offers a much-needed, refreshing take on multifactor investing in today’s market, and we believe that investors will find this approach appealing,” he says.
The WisdomTree US Multifactor Index methodology incorporates the following:
Composite factor score. The starting universe of 800 US stocks ranked by market capitalization are assigned scores for two fundamental factors (value and quality) and two technical factors (momentum and low correlation). Stocks are assigned a composite factor score based on these four individual factor scores.
Volatility scoring: The top 200 companies with the highest composite multifactor scores are included in the index and assigned a volatility score based on the trailing 12-month period, rewarding less volatile stocks with higher scores.
Risk-adjusted weighting system: Individual stocks are weighted within the index by a combination, split evenly (50/50) of their composite factor score and their volatility score over the prior 12 months.
Quarterly rebalance: The ETF is rebalanced quarterly and the maximum weight of any individual security on rebalance is capped at 4 per cent.
Sector neutrality: In addition, the fund constrains sector bets by enforcing sector neutrality versus the market. These leads to any alpha generation coming from the multi-factor selection process and not from large sector deviations relative to the market capitalisation-weighted universe.
