Living Large With A Multifactor ETF

Nearly 300 multifactor exchange traded funds are listed in the U.S. Thenumber is expected to grow in the years ahead as more ETF users look to reduce risk or bolster portfolio diversification.

The iShares Edge MSCI Multifactor USA ETF (NYSE: LRGF) is one of many mutlifactor ETFs with an emphasis on domestic large-cap stocks.

What Happened

LRGF turns four years old in April and follows the MSCI USA Diversified Multiple-Factor Index. The factors emphasized in the fund are quality, value, size and momentum. While LRGF appears to be a large-cap fund, it does include domestic mid caps.

“This strategy has delivered stronger value and mid-cap tilts than many of its multifactor peers. It aggressively pursues its targeted factors and has a higher active share than many other multifactor strategies,” Morningstar said in a recent note.

“This strategy further strengthens its style tilts by considering its holdings’ factor exposures holistically rather than mixing stocks that score well on different individual factors, which can dilute the portfolio’s factor exposures.”

Morningstar classifies LRGF as a large-cap value fund, but the research firm notes the ETF performs more like a mid-cap value play.

Why It’s Important

At the sector level, LRGF does not look like a traditional large-cap value fund. The financial services and energy sectors usually dominate those funds, but those sectors combine for less than 17 percent of LRGF’s weight. Tech stocks represent nearly 21 percent of LRGF’s roster.

“LRGF uses an optimizer to construct its portfolio that weighs each stock’s targeted factor characteristics against its contribution to portfolio risk,” according to Morningstar. 

That methodology is designed to limit exposure to any one factor as market volatility increases. The objective is to combine factors that have low correlations to each other.

What’s Next

LRGF’s long-term performance potential remains to be seen. Over the past three years, the fund trails the S&P 500 and the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (CBOE: GSLC). Investors have pulled $19.34 million from LRGF this year.

Morningstar has a Bronze rating on the fund.

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