Under the Hood of 5 Multifactor Funds
All these funds attempt to reduce the risk of underperformance by diversifying across multiple 'factors,' but there are important differences among them.
A version of this article appeared in the December 2015 issue of Morningstar ETFInvestor. Download a complimentary copy of ETFInvestor here.
Historically, characteristics such as low valuations, strong recent performance, and high profitability have each been associated with higher long-term stock returns. There are well-documented economic explanations for each of these effects (or factors), suggesting that they may persist in the future. But each of them is cyclical and can experience extended periods of underperformance. This can make individual factor funds difficult to stick with.
Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.