Factor in a Smarter Approach to ETFs

Combining an alternatively-weighted index with a multi-factor stock screening process can diversify uncompensated risk, potentially leading to less volatility in down markets and an overall smoother experience for investors. But what are factors and why should they be a major consideration for every ETF investor?

Equity markets are driven by stocks with certain attributes. These attributes are called factors, and they can be thought of as any characteristic relating to a group of securities that is important in explaining their risk and return profile. Or, in simpler terms, factors are the fundamental building blocks of return. Within the equity world, well-known factors include:

  • Value – is the stock undervalued?
  • Momentum – is the stock rising in price, and poised to rise further?
  • Size – does the stock have room to grow?
  • Volatility – has the stock delivered attractive performance relative to its volatility?
  • On their own, returns from each factor can be highly volatile. But factor returns also tend to have a low correlation to each other. Therefore, combining exposure to several factors in a portfolio can reduce the cyclicality of individual factors and increase return potential across various market environments. The key to this “multi-factor” approach is to maximize the diversification—and, as a result, more effectively allocate sources of risk—between factors.

    Multi-factor stock screening: Systematically identifies attractive stocks

    At J.P. Morgan Asset Management, when creating diversified factor indices in partnership with FTSE/Russell, we seek to ensure index constituents provide broad exposure to several factors. We do this by using a bottom-up stock filter that ranks companies based on a combination of return factors to determine whether or not they are included in the index.

    Few ETF providers have the ability to combine alternatively-weighted and factor-oriented indices in this way. We believe our disciplined index methodology and multi-factor stock screening can help address the inherent weaknesses in traditional market cap-weighted indices so that investors can achieve better risk-adjusted returns over time.

    Learn more about how J.P. Morgan Equity ETFs aim to capture most of the upside, while providing less volatility in down markets, helping to keep clients invested across market cycles.

    Investing involves risk, including possible loss of principal. Diversification does not guarantee investment returns and does not eliminate the risk of loss.
    Investment returns and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than their original cost. ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be sold or redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns