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ETF Specialist

The Case for Multifactor Funds

Investors are likely best served by not putting all their factor bets in one basket.

The case for multifactor funds is essentially the case for diversification, which Nobel Prize winning economist Harry Markowitz has described as the only “free lunch” in investing. Investors shouldn’t put all their “eggs” in one factor. But just because the argument for factor diversification is simple doesn’t mean that selecting and sticking with a multifactor strategy is easy. In fact, in light of the proliferation of multifactor funds, choosing from the now-expansive menu is becoming more difficult by the day.

Multifactor Funds Are Multiplying
The number of multifactor funds has mushroomed. As of May 31, 2018, there were 300 U.S.-domiciled index mutual funds and exchange-traded funds that were assigned the multifactor strategic-beta attribute in Morningstar’s database. [1] A total of 199 of those 300 were launched in the preceding five years. Assets in these funds have grown commensurately. As of the end of May 2018, their collective assets under management stood at $63.9 billion. Ten years ago, this collection of funds collectively held just $2.2 billion of investors’ money. Much of this growth has been organic. Over the decade through May 2018, these funds amassed an estimated $49.3 billion in net new flows.

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