One of the claims for multifactor ETFs is that these ETFs are combining different factors to overcome the timing issues investors face when using single factors. In addition to this one may also think that the usage of multifactor ETFs might help to reduce the risk within the portfolio.
To see if these multifactor ETFs can keep up with the expectations of the investors, we have analyzed the segment of multifactor ETFs within the peer group Equity Global.
Here are the facts:
There were eight multifactor ETFs within the peer group Equity Global available in the Lipper database. Three of these ETFs have been liquidated during the observation period (April 1, 2019 to March 31, 2024), while two ETFs have been launched during that period. This means only three multifactor ETFs have performance data for the full observation period of five years, while four ETFs have data over the three-year period. It is noteworthy that the sample size is below the minimum size which LSEG Lipper is using to calculate the Lipper Leaders Ratings and other comparisons.
Even though this is a rather small and statistically insignificant sample, the performance patterns of the monthly returns speak for themselves, as no multifactor ETF is able to weather all market conditions. The different performance patterns of the equity global multifactor equity ETFs are obviously due to the fact that the ETFs use different factors and weightings.
For this review we compare the returns of the equity global multifactor ETFs with the average returns of 17 ETFs which track the MSCI World Index. Out of this sample, two ETFs were liquidated and five ETFs were launched within the observation period. As a result, 10 ETFs have results over the five-year period, while 11 ETFs have results for the three-year period.
But even an equal weighted mixture of those multifactor ETFs that have data for the full observation period seems not to be superior compared to a sample of ETFs which track the MSCI World Index since the average of the multifactor ETFs shows an underperformance compared to the average of the plain vanilla MSCI World ETFs. Even worse, the best performing equity global multifactor ETF is also unable to beat the average MSCI World ETF over the three- and the five-year periods.
Graph 1: Performance Global Equity Multifactor ETFs compared to the Average ETF tracking the MSCI World index (in %)
Source: LSEG Lipper
Let’s look at the downside!
A view of the maximum drawdowns over the three-year period shows that the average equity global multifactor ETF had a lower maximum drawdown than the average MSCI World ETF. Even the drawdown of worst performing equity global multifactor ETF is somewhat similar to the average ETF tracking the MSCI World. This picture changes slightly over the five-year period since the best equity global multifactor ETF still had a lower maximum drawdown than the average MSCI World ETF. That said, the average maximum drawdown of the multifactor ETFs was higher than the average drawdown of the ETFs which track the MSCI World.
Graph 2: Maximum Drawdown of Global Equity Multifactor ETFs compared to the Average ETF tracking the MSCI World index (in %)
Source: LSEG Lipper
Can the performance difference be explained by fees and expenses?
As to expected, the average total expense ratio (TER) of multifactor global equity ETFs is higher than for plain vanilla ETFs which track the MSCI World. But the difference in cost is not high enough to explain the underperformance of multifactor ETFs.
Graph 3: TER Comparison Global Equity Multifactor ETFs vs. the Average ETF tracking the MSCI World index (in %)
Source: LSEG Lipper
Given the sample size, this article cannot be seen as proof that multifactor global equity ETFs don’t add value for investors. It would require a larger sample and additional analysis to verify the findings from this article.
The views expressed are the views of the author and not necessarily those of LSEG.
This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. LSEG Lipper cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.
