In this second instalment of our 3-part ‘Factors in ETFs’ series, we identify how investors can choose the right tools to successfully measure factor exposures in their ETF portfolios. For the first post in the series please follow this link.
Factor ETFs have experienced a growth in investors’ interest, with the five-year cumulative annual growth rate in invested assets surpassing 30% according to a calculation done by UBS.
When it comes to measuring the success of factor ETFs investors are able to deduce the success of a portfolio using performance and risk measures but when it comes to identifying and measuring the effectiveness of a promised factor exposure investors can often miss the mark.
How can investors better comprehend which factors are impacting their portfolios? This is where analytical tools become key, but with so many available, how do you choose? Below we provide three tips for picking the right factor analysis tool.
3 tips for evaluating factor-based analysis tools
Investors can leverage data-intensive analysis tools that are able to break out a range of insights on the various components of an ETF, thus providing a consistent factor framework or neutral playing field. When evaluating a factor-based analysis tool, look for the following:
Holdings–based: look for tools that are holdings-based. Confidence and clarity can be gained if the analysis is looking through to the underlying securities and not driven solely by historical returns.
Understand the output: the output should provide insights and perspectives that can be clearly understood. This is where different tools can be either more or less helpful depending on the level of investment experience. There are some complicated analysis platforms available, which have the potential to be overwhelming. The goal is to easily access and understand the exposures of an ETF to different factors in a readily-digestible format.
Independent: The analysis should be independent. There are many selection tools and comparison websites, but they may be backed by sponsors of ETFs or have a financial stake in the ETFs which are used for illustration. Tools which put the investor at all levels of expertise in control of the data are key.
Why intuitive and independent?
The rise of factor-based ETFs illustrates investor awareness of how factors can better align portfolios to individual requirements. There are different tools to help investors analyze and act on drivers impacting their portfolios in a timely manner. When selecting a factor-based analysis tool, however, investors need to be wary of systems that simply spit out an answer. After 20+ years in the business, we at Style Analytics feel strongly about providing holdings-based, intuitive, and independent factor analysis that can better support investors with their decision-making process.