US Videos

2 Multifactor ETFs for Active Risk-Takers

Alex Bryan, CFA

Alex Bryan: Investors hoping to beat the market with index funds have a couple of different multifactor funds to choose from. The case for multifactor funds really boils down to a case for diversification, trying to spread your bets out across several different investment styles that have tended to work over time.

The multifactor fund that you choose really boils down to how much active risk you want to take. Investors who are looking to limit their active factor bets might consider something like Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF, GSLC. This is a fund that takes very modest style bets. It targets stocks that have strong momentum, value, quality, and low-volatility characteristics.

If you are comfortable taking bit stronger style bets, you might consider something like the iShares Edge MSCI Multifactor USA ETF. This fund targets stocks with the best overall combination of factor characteristics, including low valuations, strong momentum, quality, and small size.

These two funds, while they target similar types of factors, look very different. In fact, the Goldman Sachs fund has a low active share of about 27%, whereas the iShares fund has an active share that's closer to 86%. They look quite a bit different and they can perform quite a bit different. The low active share Goldman Sachs fund has lower risk of underperforming, but it also has less upside potential. If you are looking to limit your active risk, that's a good fund to consider. It charges 9 basis points which makes it a very low-cost, compelling option. The iShares fund is a little bit more expensive at 20 basis points, but it's a fair fee for the risk that it takes.

Either way, these two funds are really strong options for investors looking to beat the market, and they both receive Morningstar Analyst Ratings of Bronze.