FACTOR PERSPECTIVES

Factors ETFs:
Making the style box stylish again

Sep 13, 2017
By Andrew Ang, Holly Framsted

The concept of using style tilts to target potential sources of outperformance and diversification in a portfolio has been around since the early 20th century.

Morningstar’s introduction of the “style box” in 1992 brought these screens to the mainstream and gave investors a framework for building a diversified portfolio. The style box provided a simple and enormously popular way to think about portfolio construction and to measure the success of one manager against other managers with similar investment styles. It also led to the creation of style-tilted index funds as an alternative to high-cost, actively managed style exposure products.

Today, technological improvements and easier access to data have led to a new wave of benchmarks that represent a more precise evolution of what style indexes were first meant to be—exposure to traditional active managers’ style tilts. When these indexes are tracked by an exchange traded fund (ETF) or an indexed mutual fund, the exposures can typically be delivered at lower cost and more tax efficiently than active managers within the style box. 

Style factor investing takes the concepts introduced with the 9-box grid and modernizes them. It provides investors not only with a framework for building a diversified portfolio, but also with the potential for more opportunity for outperformance by focusing on multiple rewarded factors — often at a lower cost than the average style box mutual fund. Style investing allows us to focus on the multiple insights active managers have strived to deliver and what they have leveraged to drive excess returns versus relying on the often less-descriptive style box names. In this manner, rather than investing in “Value”, “Growth” or “Blend” managers, you can think about investing not only in exposures designed to invest in underpriced securities, but also those which invest in stocks which have strong balance sheets and stocks which are displaying price strength in the market. Yesterday’s Value, Blend, and Growth have become today’s Value, Quality, and Momentum investments.

Style factor ETFs fit nicely into the style box framework and can complement or replace existing active strategies to help reduce weighted average costs in portfolios or potentially improve overall performance.

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Andrew Ang
Head of Factor Investing Strategies
Andrew Ang, PhD, Managing Director, coordinates BlackRock’s efforts in factor investing. He leads BlackRock’s Factor-Based Strategies Group which manages macro ...
Smart Beta Senior Strategist, BlackRock