Multifactor at the core of a portfolio
Learn how Multifactor ETFs can help take advantage of current market trends by listening in on a fireside chat between Michael Lane, Head of iShares U.S. Wealth Advisory, and Luke Smart, Head of U.S. iShares Sustainable and Factor Strategies.
Building a Championship Team
I was recently reading my favorite book Moneyball by Michael Lewis (i.e. I binged the movie on Netflix*) and couldn’t stop myself from drawing parallels between the baseball strategy that Oakland A’s general manager Billy Beane implemented and the recent enhancements that were made to our multifactor ETFs, LRGF and INTF.
For those that haven’t read the book or seen the movie, Billy Beane was given the impossible task of building a great baseball team with little-to-no money and (SPOILER ALERT) he was successful.
So how did he build a championship caliber team? He took a data driven process to find consistent players at a low cost. Now let’s see how LRGF and INTF stack up against his system:
Data Driven Process – What do the numbers say?
Factor ETFs rely on data-driven, time-tested strategies, rather than analyst’s (baseball scout’s) opinions. LRGF and INTF are designed to invest across 5 historically rewarded Factors: Quality, Value, Momentum, Low Size and Low Volatility through a transparent, systematic, and rules-based approach:
| Factor | Description |
|---|---|
| Quality | Investing in profitable, stable companies that are efficient with capital |
| Value | Investing in stocks that are cheap relative to their fundamentals |
| Momentum | Investing in stocks with positive trends |
| Low Size | Investing in smaller, more nimble companies |
| Low Volatility | Investing in lower risk, less volatile securities |
Source: BlackRock
When looking at the historical data, research has found that each of the above factors has outperformed the market or reduced risk in the long run1. More importantly, there’s an economic rationale – a reward for bearing higher risk, a structural impediment, and/or behavioral biases – for why we believe this will to continue going forward. Based on the data, having a long-term, strategic tilt towards all factors may be prudent.
Seek Consistency – “A walk’s as a good as a hit”
Billy Beane famously replaced his homerun hitting superstar, Jason Giambi, with a little-known player named Scott Hatteberg. Why? Because even though Hatteberg may not have been as flashy as Giambi, he got on base and was consistent.
Similar to the Oakland A’s strategy, multifactor ETFs combine differentiated sources of return into one solution to potentially reduce the cyclicality of each factor and seek to provide more consistent results.
Source: BlackRock
Sometimes your team is getting on base easily and scoring runs. Other times, your team relies on your pitching staff. A well-balanced team with a consistent offense and defense can help your team win more games over the long season.
In a similar way, some factors will be in favor while others will be out of fashion. By combining 5 separate factors that outperform at different parts of the business cycle, investors can seek outperformance over the long term while aiming to maintain a controlled level of active risk.
Low Cost – Manage your Payroll Wisely
Managing a team’s payroll is like managing the total expense ratio of your portfolio – we want to efficiently allocate our capital for the greatest potential outcome. LRGF and INTF are the lowest cost multifactor ETFs in the industry2, which can help investors offset some of the more expensive players in their portfolio. When compared to their respective Morningstar categories, both funds are significantly cheaper than the average mutual fund and ETF.
Source: BlackRock, Morningstar as of 8/31/2023. Comparison is between the Net Expense Ratio for the iShares U.S. Equity Factor ETF (LRGF) and the average Prospectus Net Expense Ratio of US-listed open-end mutual funds (0.92%) and ETFs (0.43%) in the Morningstar US Large Blend Category as of 8/31/2023. Comparison is between the Net Expense Ratio for the iShares International Equity Factor ETF (INTF) and the average Prospectus Net Expense Ratio of US-listed open-end mutual funds (0.99%) and ETFs (0.36%) in the Morningstar Foreign Large Blend Category as of 8/31/2023. Analysis compares prospectus net expense ratios.
Using LRGF and INTF as long-term, core holdings can free up budget for investors who are also looking to spend a little more of their salary cap to add that star pitcher or cleanup hitter (e.g., alpha-seeking funds).
A Winning Formula
Building a portfolio that systematically targets a diversified set of return drivers does not need to cost a fortune. As Billy Beane showed us – building a winning team can be done at a low cost. Replacing expensive, overpaid homerun hitting stars (underperforming active managers) with lower-cost, consistent players (factors) can be a winning formula.
