In this video, Morningstar speaks with Schwab strategist Tony Davidow about factor based investing and how to compliment an existing portfolio with factor and fundamental based indexing strategies. Used institutionally for many years to evaluate portfolio risk exposures, then later used for targeted investing, factor based investment approaches, such as momentum, value, quality, high beta, and low beta factor strategies are now being brought to the retail market through many of the index and ETF providers. More sophisticated versions of these strategies have even come into existence with the low volatility equity approaches. All of these strategies allow investors to more precisely structure their portfolios based either on specific allocations they want to make (or remove) in their portfolio, or to fill gaps in a portfolio due to allocations to other managers and strategies.
For example, an advisor may want to take a long term position on high quality companies. A quality factor ETF, such as the iShares MSCI USA Quality Factor ETF (QUAL) would allow an advisor to do so quickly and efficiently. In another instance, a family office may hold multiple high volatility, growth oriented equity managers and want to balance this approach with a lower volatility index portfolio. The family office would be able implement that approach with an ETF such as the iShares MSCI USA Minimum Volatility Index Fund (USMV). Thus, these factor, or smart beta (we prefer “smarter beta”), based strategies provide strategic arrows that investors can use to round out their portfolio or take tactical positions as desired.
Click the link below to view the video and learn more about factor and fundamental based investing.