By: Rolf Agather, Managing Director, North America Research, CFA
The sharks were circling last week in Hollywood, FL – but not in the warm blue waters off the beach. They were indoors at the Inside ETFs annual conference.
Flipping the usual Shark Tank format, “Welcome to the Advisor Tank” allowed a packed room of investment advisors to play the role of sharks as they heard product pitches from four leaders in the growing multi-factor ETF world. These were Yasmin Dahya of JPMorgan Asset Management, Arne Noack of Deutsche Asset Management, Matthew Bartolini of State Street Global Advisors and the original “shark” himself, Kevin O’Leary of O’Shares Investments and host of CNBC TV’s “Shark Tank” program. I had the honor of moderating the panel.
Each panelist “pitched” their approach in much the same way as a guest on Mr. O’Leary’s show might present his or her concept for a new business. And while some common threads emerged among the four, the different approaches of each product brought home for me just how diverse and innovative the multi-factor ETF playing field is today. It also clearly reinforced the need for more education on multi-factor strategies.
Matt Bartolini at SSGA ETFs made the market case for using multi-factor indices, citing the inherently cyclical nature of the equity market and its impact on single factor indexes. “Low volatility-oriented US stocks, for example, were performing quite strongly at the beginning of 2016, only to face relative challenges at year-end,” said Matt. He went on to describe "focused factor" approaches, which in his view provide investors the opportunity to be exposed to a broad universe of stocks exhibiting low volatility, yield or momentum characteristics.
Arne Noack of Deutsche ETFs likened successful multi-asset investing to a pentathlon competition. “If you are looking to win a competition comprised of five events, you wouldn’t pick Usain Bolt or Michael Phelps,” stressed Noack. “You would pick an athlete who is very well rounded across all five events.” Noack cited the Russell 1000® Comprehensive Factor Index as an index tool that blends several factors into a single index.
For Yasmin Dahya at JPMorgan ETFs, multi-asset ETF investing was all about having a better vehicle for the investment journey. She described smart beta as the intersection of active & passive investing and as a way to blend the best of the firm’s active management capability with a rules-based approach. Dahya explained that using market cap indexes as the basis for an investable product is “inherently risky because they can become over-concentrated in a single factor”.
And for Kevin O’Leary of O’Shares, multi-factor ETFs were about having it his way. “I approach this market as an investor,” said O’Leary, going on to describe working with FTSE Russell to design a multi-factor index that sought to capture his objective of gaining consistent exposure to stocks blending quality, low volatility and higher yield characteristics.. “FTSE Russell designed an index to adhere to my rules while being simple, conservative and easy-to-understand.”
And, most exciting for our panelists, the presentation clearly had an impact on attendee interest in multi-factor ETF investment approaches. At the beginning of the session, nearly 16% said they were “highly likely” to invest in multi-factor ETF products in the next 18 months. By the end of the session that number jumped to 43%. The investment sharks are definitely circling.
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Views expressed by Rolf Agather of FTSE Russell, Yasmin Dahya of JPMorgan Asset Management, Arne Noack of Deutsche Asset Management, Matthew Bartolini of State Street Global Advisors and Kevin O’Leary of O’Shares Investments are as of January 26, 2017 and subject to change. These views do not necessarily reflect the opinion of FTSE Russell or the LSE Group.