European and US multi-factor ETFs have seen a surge of inflows in recent months as the western world equity rally shows no sign of abating and investors are keen to avoid market timing.
According to TrackInsight data, European multi-factor ETFs have gathered €132 ($156.4) million over the past month, pushing year-to-date inflows to $737.1 million. Total assets now stand at $1.8 billion.
Compare this to US-focused multi-factor ETFs, which boast $10.7 billion. Over the last month, they have gathered $139.5 million, and just over $2 billion since 1 January.
Both categories, regardless of geography, combine stocks that pertain to certain equity risk factors like momentum, value and growth, to aim for positive returns in all market conditions.
Seeking smooth returns
Performance has not been consistently positive, however. In the US, multi-factor ETFs were up by around 1.8% since the New Year. Their European counterparts are up 13.4% over the same period, beating the Euro Stoxx 50 by more than 2.5% in the same timeframe.
Low performance in the US could be hard to swallow given markets are at record highs. The Dow Jones Industrial Average has risen by about 24% since January. Nearly every week, the stock market reaches new highs, partly due to the success of certain tech firms and market participants’ optimism surrounding a Republican, pro-business government in Washington DC.
The S&P 500 is up more than 17%, and many ETFs tracking this benchmark are much cheaper than multi-factor ETFs.
However, if Donald Trump fails to push through his tax bill, investors could lose confidence in the administration’s ability to implement policy, which could have broader ramifications given experts say US stock valuations are stretched.
Multi-factor ETFs in the portfolio
Abby Woodham, ETF Strategist for Deutsche Asset Management, said at a recent Morningstar ETF conference that investors were worried about the next market pullback and how to prepare for it, which explained a surge towards multi-factor ETFs.
“You want to have market exposure but protect towards the downside, and so a multi-factor strategy can have low volatility exposure,” she said. “It can have high quality exposure. These are things that can help cushion to the downside.”