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According to Veronika Popova, Director of ETF Strategy at CI Global Asset Management, traditional index ETFs are not always the best way to invest in the stock market. Popova suggests that factor ETFs may have the potential to outperform traditional market-cap weighted indices through both bull and bear markets.
Factor investing is a strategy that focuses on specific drivers of return beyond the average returns provided by the sector or asset class. Factor ETFs take an index and apply additional filters to only include companies that meet certain criteria, depending on the factor being considered.
Some factor strategies work especially well during inflationary or stagflationary periods. Popova highlights three factor ETFs that she believes are among the best strategies today.
Value Factor ETFs provide exposure to the factor by investing in companies that exhibit certain value characteristics, such as a low price-to-book ratio, a low price-to-earnings ratio, and a low price-to-sales ratio. The CI Morningstar Canada Value Index ETF (FXM) is an example of this type of ETF, which provides exposure to the companies that meet certain valuation criteria.
Dividend Growth Factor ETFs focus on companies that are not only paying but also growing their dividends. Popova explains that dividends have provided roughly 40% of total market returns since the 1930s and close to 54% during high inflationary periods. The CI WisdomTree US Quality Dividend Growth Index ETF (DGR.B) is an example of this type of ETF.
Momentum Factor ETFs focus on increasing exposure to stocks or industries that have been outperforming and decreasing exposure to underperforming sectors. Popova states that momentum strategies have been a main driver of returns over the past 20 years, both in North America and abroad. The CI Canada Momentum Index ETF is an example of this type of ETF.
Popova suggests that factor strategies are compatible with investors who want a more targeted exposure to a particular index and are looking to take advantage of a certain trend, be it dividend growth, quality, momentum, or a value-based approach. She recommends incorporating multiple factors or a multi-factor strategy into a portfolio.
Factor ETFs provide a more managed approach to a passive index fund and aim to increase the returns that can be generated from the index. Popova emphasizes that beyond their proven ability to beat index returns long-term, factor strategies often do so with reduced volatility and low fees.
Visit CI Global Asset Management's list of ETFs for more information.
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1 Adapted from source: "Get Smart with Smart Beta ETFs | CI Global Asset Management." CI Global Asset Management, 3 Mar. 2023, www.cifinancial.com/ci-gam/ca/en/expert-insights/articles/benefits-of-smart-beta-etfs.html.
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