This Fund Leans Into Performance-Based Factors
IShares Edge MSCI Multifactor USA ETF sacrifices a transparent portfolio construction process in order to offer higher factor exposure.
IShares Edge MSCI Multifactor USA ETF (LRGF) offers exposure to well-constructed, time-tested factors that have historically been associated with market-topping performance. The exchange-traded fund's factor tilts are stronger than most of its peers, but its portfolio construction is opaque and complex. Its low fee should contribute to its edge over the long run, but its short live track record limits its Morningstar Analyst Rating to Bronze.
This fund seeks to maximize its aggregate exposure to stocks with attractive value, momentum, small size, and quality characteristics, while matching the risk level of its parent index, the MSCI USA. To achieve this, the fund constructs a portfolio using an optimizer that balances each stock's targeted factor characteristics against its risk. This can lead to inconsistent factor loadings through time because the optimizer shrinks its allocation to factors as their volatility increases. By targeting factors with low correlations to each other and constraining its stock and sector weightings, this strategy should diversify risk. But the optimization process is complex and opaque, which makes it difficult to assess how the portfolio will shake out.
Adam McCullough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.