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ETF Specialist

Discipline at the Core

A look at three funds that attempt to harness the underlying drivers of stock returns.

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Investing has always been part art and part science, but leaning more heavily on a scientific approach may help improve consistency. Through fundamental research, a manager may decide to purchase stocks with varying degrees of value, momentum, and market exposure--the elements that appear to drive stock returns. But without directly targeting these dimensions of return, a portfolio's risk and expected return relative to the market can change over time.

Investors can obtain more consistent exposure to these return drivers through rules-based funds that specifically target value, quality, low volatility, or momentum. Each of these strategies has worked in most markets studied over long horizons, based on many independent studies. There are three possible reasons each strategy has worked: It may collect a risk premium, capitalize on behavioral biases, or exploit institutional frictions.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.