Multi-factor ETFs gain on fears of market pullback

Equity markets are still rallying, but investors are choosing to quit while they're ahead

Multi-factor ETFs gain on fears of market pullback
Even as the rally in western equity markets continues, some analysts have warned of an impending pullback. According to such voices, it’s not a question of if, but when — and it seems ETF investors aren’t waiting to find out.

Inflows into European and US multi-factor ETFs — which combine stocks that pertain to different equity risk factors like momentum, value, and growth — have reportedly surged in recent months, according to data from TrackInsight.

European multi-factor ETFs have amassed US$156.4 million in the past month. Because of that, year-to-date flows have reached US$737.1 million, while total assets stand at US$1.8 billion.

Meanwhile, US-focused multi-factor ETFs have gathered US$139.5 million in flows over the last month; year-to-date flows have exceeded US$2 billion. The US segment dwarfs its European counterpart when it comes to assets, boasting US$10.7 billion.

When it comes to performance, US multi-factor ETFs have gone up by 1.8% since the New Year, in contrast to the S&P 500 which has swelled by more than 17%; the Dow Jones Industrial Average has advanced more than 24%. Given the poor performance of US multi-factor ETFs against their benchmarks, investors who quit while they’re ahead by switching out of index funds must be feeling especially stung.

The shift isn’t so painful for their European counterparts, however. The Euro Stoxx 50 has gone up by more than 2.5% since the start of the year, while European multi-factor ETFs are up 13.4%.

“You want to have market exposure but protect towards the downside, and so a multi-factor strategy can have low volatility exposure,” Abby Woodham, ETF Strategist for Deutsche Asset Management, reportedly said at a recent Morningstar ETF conference. “It can have high quality exposure. These are things that can help cushion to the downside.”

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