Morningstar Magazine - October/November 2016 - 60

Strategies EXHIBIT 5 dimensions covered above yield meaningfully different results. E X H I B I T 5 plots the total returns and the standard deviation of weekly returns for each of these eight funds from Nov. 29, 2015, to 10 Aug. 6. (I've also included Vanguard Total Stock Market ETF VTI as a point of reference.) Note that this is a very small sample, but it does capture 8 the early 2016 sell-off, the post-Brexit blip, and the subsequent rally to new highs. But it's still a small sample. Benchmarks Matter All eight multifactor funds follow a similar strategy, but their benchmarks vary slightly-which greatly affects performance. Total Return (%) 10 8 6 What's notable in these figures is the degree of dispersion among the best- (JPUS) and 4 worst-performing (iShares Edge MSCI Multifactor USA LRGF) funds, which amounted to 5.7 percentage points. These two funds also happened 2 to have the lowest (JPUS) and highest (LRGF) beta (a measure of each portfolio's sensitivity to movements in the broader market) relative to the S&P 500 during this span. Thus, the relative outperformance of the lower-beta funds on the list is reflective of 1) the fact that low-beta stocks outperformed both the market at large and their high-beta counterparts during the period in question and 2) the potential for the low-volatility component of these funds' factor lineups to dominate the other factors. My Favorites Playing favorites here is difficult given that each of these strategies is designed to deliver somewhat different outcomes. Thus, I've selected three from the eight, each representing a distinct profile as measured by the magnitude of their factor bets and their expected risk characteristics. Each fund can serve as a core building block in a diversified portfolio. Below, I list some pros and cons. Goldman Sachs ActiveBeta U.S. Lrg Cap Eq ETF GSLC Pros g At 0.09%, GSLC has the lowest fee of the group, on par with SPDR S&P 500 ETF SPY. g A very sensible and transparent index methodology. g Modest factor bets that will result in relatively low tracking error relative to a cap-weighted index of large-cap stocks. Con g Modest factor bets will yield modest outperformance, at best, relative to a fund tracking a cap-weighted index of large-cap stocks. 60 Morningstar October/November 2016 6 4 12.5 13.0 13.5 Standard Deviation of Weekly Returns (%) 14.0 Total Return (%) 1 Goldman Sachs ActiveBeta US LgCp Eq ETF GSLC 12.5 13.0Large Cap ETF13.5 JHML 1 JHancock Multifactor 2 14.5 14.0 5.40 5.95 14.5 Standard Deviation (%) 13.48 15.0 14.16 1 iShares Edge MSCI Multifactor USA LRGF 3.27 14.13 1 JPMorgan Diversified Return US Eq ETF JPUS 8.96 12.82 1 Global X Scientific Beta US ETF SCIU 6.57 13.21 1 Deutsche X-trackers Russell 1000 CmpsFtr DEUS 7.90 13.04 1 ETFS Diversified-Factor US Large Cap SBUS 6.80 13.21 1 SPDR MSCI USA StrategicFactors ETF QUS 7.23 12.83 1 Vanguard Total Stock Market ETF VTI 5.56 14.67 Source: Morningstar. Data from Nov. 29, 2015, to Aug. 6, 2016. IShares Edge MSCI Multifactor USA LRGF Pros g Makes relatively bigger factor bets versus its peers. g Does so while attempting to maintain a risk profile in line with its parent index, the MSCI USA Index. Cons g A fairly opaque and complex index methodology. g Will likely be more volatile versus its peers given its more-concentrated portfolio and the absence of a low-volatility component. JPMorgan Diversified Return U.S. Equity ETF JPUS Pros g A very risk-conscious methodology will likely yield more-muted drawdowns relative to peers tracking cap-weighted indexes, as well as other multifactor ETFs. g Index methodology was derived from JPMorgan's pre-existing equity strategies. Cons g Volatility weighting and the low-volatility component will likely dominate other factor bets. g Its sector volatility weighting approach could result in capacity constraints for this strategy. K Ben Johnson, CFA, is director of global ETF research with Morningstar. He also is the editor of Morningstar ETFInvestor, where this article originally appeared.

Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2016