Eugene Fama, the de-facto originator of the Efficient Market Hypothesis, helped popularize the Fama-French three-factor model, which he developed alongside Finance professor Kenneth French in the 1990s. The three factors: size, value, and market (beta), were joined by a momentum component in the Carhart four-factor model. That model, developed in 1997, now serves as a reference point for a suite of new iShares smart-beta ETFs.
According to Forbes contributor Frank Armstrong III, it’s “almost universally agreed” that investors willing to hold small (size) companies and/or companies with low price-to-book ratios (value) “can expect additional returns.” What’s more, these premiums can be captured by passive strategies, incurring lower fees than actively managed funds.
Adding a momentum factor helps capture even more returns, according to proponents. Monthly momentum is measured by subtracting the equal-weighted average of the highest performing firms from the equal-weighted average of the lowest performing firms one month earlier.
“Research has shown that stocks reflecting certain factors have, over time, provided a higher return than the overall market,” said Mark Carver, Head of US iShares Equity Smart Beta, in an April 30 statement. “With the launch of this new suite of ETFs, investors now have the added flexibility to implement a multi-factor strategy, or if they prefer, express a view on a single factor using iShares Smart Beta funds.”
The new funds include:
- iShares FactorSelect MSCI USA ETF (LRGF)
- iShares FactorSelect MSCI USA Small-Cap ETF (SMLF)
- iShares FactorSelect MSCI International ETF (INTF)
- iShares FactorSelect MSCI International Small-Cap ETF (ISCF)
- iShares FactorSelect MSCI Global ETF (ACWF)
The selection of funds gives investors the opportunity to target their exposure to the U.S., the world excluding the U.S., or the globe; with further ability to focus on small-cap issues in the U.S. or abroad. Each of the funds track a related index from MSCI.
“MSCI Diversified Multi-Factor Indexes enable investors to create diversified portfolios with maximum exposure to target factors,” said Alain Dubois, Global Head of Index Product Management at MSCI. “Optimal exposure to a diversified set of factors is a major development in strategic indexing and we are pleased that iShares is once again expanding their factor ETF suite based on MSCI indexes.”
For more information, visit the Multi-Factor Strategies page at ishares.com.