Factor ETFs & Futures
Factor Investing DIY Tools?
February 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Investors can directly access factor returns via ETFs in the US & futures in Europe
- However, neither of these come without some investor concerns
- Realised returns differ substantially from theoretical returns
INTRODUCTION
Despite factor investing having gained immense popularity in recent years, it has been relatively difficult for most investors to directly access long-short factor returns as portrayed in academic and quantitative research. Smart beta ETFs have flourished, but these are long-only products with excess returns that differ from those of the long-short factors (please see our report Smart Beta vs Factor Returns). However, in recent years a few product providers have launched products that allow most investors to gain more direct access to factor exposure. In this short research note we will analyse factor ETFs in the US and factor futures in Europe.
METHODOLOGY
We focus on factor ETFs in the US from AGF Management Limited and factor futures in Europe from the Eurex Exchange. The factor data used in benchmarking the investible products is created by constructing long-short beta-neutral portfolios of the top and bottom 10% stocks ranked by the factors. Portfolios rebalance monthly and include 10bps of transaction costs. Only companies with a market capitalisation of larger than $1 billion are included.
FACTOR ETFS IN THE US
The factor ETFs in the US are available for the Value, Momentum, Size and Low Volatility factors (we ignore the Dividend factor ETF as it has less trading history). They are constructed as dollar-neutral long-short portfolios and rebalance monthly. The ETFs have been launched in 2011 and offer investors the opportunity to directly harvest factor returns via easily-traded securities. Unfortunately the assets under management are below $10 million for each of the ETFs, which can be seen in the chart below. At that fund size the expense ratios are exceptionally high, which deters investors. However, the ETF provider has agreed to reimburse fees and keep the ratio from exceeding 0.75% per annum, which is competitive for a long-short product.
