Low excess return correlations can make single factor ETFs effective portfolio building blocks.
A range of multifactor ETF options cater to different investment risk tolerances and investment objectives.
Equity factor ETFs grew from $390 billion assets under management (AUM) in 2014 to $2.07 trillion in 2024.1
| QVML | OMFL | |
|---|---|---|
Factors |
|
|
| Approach |
|
|
| Historical tracking error | 1.6% | 7.5% |
Source: Bloomberg L.P., 06/31/21-12/31/24. QVML inception date: 6/30/21. QVML annualized tracking error relative to S&P 500. OMFL annualized tracking error relative to Russell 1000. Past performance is no guarantee of future results.
Factor ETFs have experienced significant AUM (assets under management) growth over the past 10 years, ending in 2024. Analyzing AUM over time allows us to understand how client demand has evolved. Over a 10-year period, the compound annual growth rates (CAGRs) of the AUM in various factor ETF categories all experienced meaningful growth rates, with quality and momentum growing the fastest. (See table below.)
| CAGR% | ||||
|---|---|---|---|---|
| Category | 3 Year | 5 Year | 10 Year | 2024 AUM (MM) |
| Growth | 16% | 23% | 21% | $642,604 |
| Value | 9% | 16% | 18% | $482,121 |
| Dividend/Yield | 11% | 15% | 14% | $414,798 |
| Size | 15% | 23% | 19% | $149,839 |
| Quality | 37% | 33% | 36% | $100,194 |
| Low Vol | -8% | -10% | 13% | $50,788 |
| Momentum | 7% | 15% | 23% | $27,454 |
| All Single Factor | 13% | 17% | 18% | $1,867,798 |
| Multi Factor | 12% | 14% | 20% | $206,847 |
Source: Bloomberg L.P., as of 12/31/2024.
In looking at the growth of AUM of five single factor categories, dividend yield is by far the largest category, reaching $415 billion at the end of 2024. (See chart below.) The other categories range from $27 billion to $150 billion. To compare their growth patterns, dividend yield is charted on the right Y-axis, and the other four factor categories on the left Y-axis. Quality has the highest growth rate among this group across all time periods.
Source: Bloomberg, L.P., data through 12/31/2024.
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Diversification does not guarantee a profit or eliminate the risk of loss.
The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.
The Russell 1000 Index is an unmanaged index considered representative of large-cap stocks. The Russell 1000 Index is a trademark/service mark of the Frank Russell Co. Russell® is a trademark of the Frank Russell Co.
Tracking error measures the divergence between price behavior of a portfolio and the price behavior of a benchmark.
A factor is an objective style determinate used within an index to achieve mutually exclusive security selection.
Factor-based strategies make use of rewarded risk factors in an attempt to outperform market-cap-weighted indexes, reduce portfolio risk, or both.
Factor investing is an investment strategy in which securities are chosen based on certain characteristics and attributes.
Factor-based strategies make use of rewarded risk factors in an attempt to outperform market-cap-weighted indexes, reduce portfolio risk, or both.
Beta is a measure of risk representing how a security is expected to respond to general market movements.
Compound annual growth rate (CAGR) is the measure of an investment’s annual growth rate over time, with the effect of compounding taken into account.
The CAGR% chart depicts ETF categories determined by Bloomberg. Growth ETFs typically invest in stocks with higher growth characteristics as measured by sales growth, earnings change to price, and price momentum. Value ETFs typically invest in stocks trading at a discount to intrinsic value based on measures such as price-to-earnings or sales. Dividend/Yield ETFs typically invest in stocks with higher dividend yields than their peers. Size ETFs typically invest in stocks with smaller market capitalizations. Quality ETFs typically invest in stocks with low leverage and high return on equity, cash flow, and profitability. Low volatility ETFs typically invest in stocks with lower-than-average volatility or beta. Momentum ETFs typically invest in stocks with strong recent performance.
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