A Multifactor Strategy That Effectively Manages Risk
A low-volatility mandate should improve risk-adjusted performance.
Fund providers have launched a number of multifactor strategies over the past several years. These funds try to diversify their factor exposures and span a wide range of approaches from simple to complex. No two are alike, and nuance often makes the difference between good and bad. Hartford Multifactor Developed Markets ex-US ETF (RODM) lands on the good side. It looks for stocks with a strong combination of value, momentum, and quality characteristics. Then it adds a low-volatility strategy on top to help control risk. It earns a Morningstar Analyst Rating of Silver.
This strategy starts with all large- and mid-cap stocks listed in 22 developed markets outside of the United States. It scores each one on the strength of its value, momentum, and quality characteristics and combines them into an overall score for each stock. Half of each stock’s composite score is based on its valuation. Another 30% is tied to its momentum, with the final 20% determined by its profitability. An optimizer then selects and weights stocks to maximize the portfolio’s exposure to names with strong overall scores while limiting risk. It uses each stock's historical standard deviation and correlation with others to build a portfolio with 20% lower expected volatility than the market. This is an effective way to improve risk-adjusted performance because there isn’t a strong relationship between risk and return among individual stocks.
Daniel Sotiroff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.