Multi-factor exchange traded funds (ETFs) combine several different investment styles in one product. But can you really achieve diversification with a single ETF and do they provide better risk-adjusted returns than a basic index?
In recent years ETF providers have grown more adept at injecting elements of active fund management into ETFs instead of merely replicating basic stock indices. One way of doing this has been to home in on particular styles of stock within an index, such as value or momentum. These stocks are likely to do well in certain market conditions but not others, and are designed to be short- to medium-term holdings.
Multi-factor ETFs combine several of those factors into a single ETF, on the premise that one factor will always be driving the market even if others are underperforming, meaning the ETF should deliver better returns over the long run than a single-factor ETF or a broader index.