Transcript: Multifactor ETFs

Multifactor ETFs

David Stephenson

February 27, 2019 12:00 pm to 1:00 pm ET

[CAN MULTIFACTOR ETFS IMPROVE PORTFOLIO RISK AND RETURN WITH DAVID STEPHENSON]

Thank you for rejoining us. We apologize for technical difficulties. But good afternoon, everyone, and thank you for joining us today. On behalf of CIBC Investor's Edge, I would like to welcome you to this webinar. My name is Peter Campbell and I'll be your host for this event. Now a few things before we get started CIBC Investor Services Inc. does not provide any investment, or tax advice, or recommendations.

[DISCLAIMER]

So everything we share with you today is for educational purposes only. We are recording today's session, and a link will be emailed to any that registered online.

[FULL SCREEN CONTROL Q&A WINDOW]

To view this webinar in full screen, please click on expanded arrows located on the top right hand corner of your screen. And if you have any questions during the presentation, please kindly take a note. And you'll have the opportunity to submit your question after the presentation. Our topic for today's webinar will provide an introductory level overview of Multifactor ETFs and their benefits to an audience new to factor-based investment. To present this today, we are very excited to have David Stephenson here to share his expertise in the subject matter. With great pleasure, please join me in welcoming David for today's presentation. That's great.

[REPRESENTATIVE EQUITY RETURN FACTORS CAN BE USED IN ISOLATION OR COMBINATION]

Thanks very much, Peter. And I'd like to start by just thanking everyone for taking the time to join us this afternoon. I'm just going to backtrack a little bit here.

[AGENDA]

So we have a full agenda this afternoon. And what I thought I do is kind of break the presentation down to essentially five different components. So I will start with an overview of strategic beta and the Canadian landscape. And then talk about the case for factor investing, and then specifically the investment case for multifactor. How Multifactor ETFs are constructed? And then probably, you know, one of the reasons most of you are on the call today is how you incorporate multifactor into your own portfolio. And then, I'll leave a little bit of time towards the end of the call for Q&A.

[WHAT IS STRATEGIC BETA?]

So before we get into the specifics, it's probably helpful to define, you know, what is actually strategic data? And when you look at it within the ETF industry, I think part of the confusion for a lot of investors is there's really no universal consensus on, you know, what the most appropriate term is. So you've probably heard other terms like alternative beta, smart beta, multifactor investing, and even fundamental investing. You know, at the end of the day, I think, generally, what's been accepted as strategic beta is anything other than, you know, your standard market cap-weighted index. So when I personally think about strategic beta in terms of how to define it, I look at it as, you know, obviously a very diverse and growing category of rules based approaches to investing in various markets.

So the methodologies behind strategic beta portfolios, no matter where if you kind of look at it from, you know, different ETF provider to other ETF providers in the marketplace is that they're all designed to essentially screen an investment universe for securities with certain characteristics, which are factors. And also we're going to explain those as we go throughout the presentation today.

And really the end objective there is either, you know, achieve better returns, less risk or some other desired attribute, such as income generation. And I think we're also familiar with dividend ETF strategies and that would be one example of income generation. So I think, you know, to kind of sum up the intent of this slide is it's a very broad category. Anything other than, you know, a market cap based index can be defined as strategic beta.

[DIFFERENT TYPES OF STRATEGIES]

Moving onto slide four, I think this is one of the key slides in the entire deck. And it's kind of useful to look at different types of strategies on what I call an investment continuum. So on the very left, I think we're all familiar with passive ETFs. So the objective of passive ETF is to match a particular index and less fees rather than beta. So a good example of that would be XIU which is an iShares ETF that tracks the S&P/TSX 60 index, holds all of those particular stocks according to their market cap-weight. And the objective really is to match the performance of that index less fees.

On the other end of the spectrum, we have active strategies and obviously, I think we've all owned active strategies on our own portfolios, active mutual funds. Really, the objective there is, you know, by selecting certain securities, sectors and asset classes, what the managers are trying to do there is outperform a particular benchmark index and outperform it sometimes with that less risk. Now when you look at the middle of the chart, I think this is where strategic beta fits in within this continuum. And what it's really trying to do at the end of the day is give you the best of both worlds.

So like a passive ETF exposure, it's usually constructed on a rules-based implementation methodology. And like a passive ETF, they tend to be lower cost than active managers. And then like an active manager really what it's trying to do as well is give you active returns. So the objective is to outperform an index as well. So I think this slide, you know, nicely summarizes, you know, the different types of strategies that we have as investors to kind of, you know, put into our portfolio. I think they all have a place in your portfolio.

It's just a matter of understanding, you know, what they do, and how they interact with each other in your portfolio. And the one, you know, point I'd like to leave you with on this slide as well as is there has been a lot of a talk, particularly in the US about a massive shift from active into passive. And I think a lot of the shift has been a result of, you know, there's a lot of funds in the US and in Canada for that matter that are what you would call a closet indexers. They don't give you a lot of different exposures than going out and buying a passive mutual fund, but they charge you a higher fee. So there has been a shift from, you know, active and the beneficiaries of that are in both passive and strategic beta. So as we go through the presentation here this afternoon, kind of, give you an idea as to why that shift has occurred, and how strategic beta fits into your portfolio.

[STRATEGIC BETA ETF LANDSCAPE]

The next slide basically because strategic beta is so widely defined, I think this is more of a high level, you know, $163 billion in ETF assets industry wise, so all of Canada, as of September 2018. Actually, it numbers from the end of January of this year, there's about $165 billion in total ETF assets. So even though these numbers are from September, which are the most recent, it's still fairly reflective of where total assets reside today. But I think what's interesting here is if you look back to December 2016, there has been a huge proliferation of ETF launches here in Canada.

Obviously, the total was about 456 products back in December of 2016. And today we're somewhere in the 750 range. So there's a lot of choice for your portfolios. And, you know, how do you do your due diligence on these type of products? And not only that, we kind of looked at distribution of the products. There has been a lot of interest in active and passive, so over 40% of ETFs today in terms of total number of funds are in active and strategic beta, you can kind of see that passive, there hasn't been a lot of growth in passive product launches over the last year or two, increased from 246 in June to, you know, 252. You know, so a lot of interest by Canadian investors for more active strategies. So I think this kind of, you know, bears that out in terms of strategic beta when you look at it within the overall industry, it's probably about 12% of the market.

So the next slide that I go into kind of breaks that down a little bit more. So when I look under the umbrella of what's defined as strategic beta, you know, where do those assets reside? So most of the assets today are still in dividend and equal-weighted factors, they are the largest allocations within the strategic beta category. But we have seen a lot of growth in particular over the last three years.

If you went back to December 2015, we had about 26 ETFs classified as multifactor. And then towards the end of September of last year, we're about 60. And we have seen a lot of interest in, you know, multifactor, there has been about 20 product launches just in that one category itself over the last year. And I expect that trend to continue here into the future as well. So a lot of growth there, I think this just puts into perspective that, you know, we have $165 billion ETF industry, about $20 billion of that would be in strategic beta ETFs, and then of that total category, you get about a quarter of the assets, you know, sitting in basically multifactor.

[WHERE DOES MULTIFACTOR FIT IN?]

So when I kind of take a step back now and I look at it high level, you know, we've defined what strategic beta is. You know, we've looked under the hood a little bit to what's actually defined as, you know, different subcategories. So where does multifactor, you know, fit in at the end of the day? And I do like this chart by Morningstar, and you know, what they've done is they've kind of put multifactor into what's called a return oriented category. Obviously, if you're looking for multifactor exposure with your own portfolio, you're doing it for performance and much like you would, you know, we can all go out today and buy, you know, value ETF, growth ETF, or any other ETF really for that matter.

Multifactor is no different really at the end of the day from a return perspective. And then in the middle there, one of the other factors that I will be talking with you a little bit this afternoon is low vol, and low beta. That's actually defined in the risk-oriented category. So if you're looking for exposure to that particular factor, you're doing it because you want to lower the risk in your overall portfolio.

So that kind of like nicely summarizes kind of, you know, where does multifactor fit in to a portfolio. I've always mostly talked about how it's growing in the industry, and how we can expect that to continue to grow over the next say, two to three years. And towards the end of the presentation, we'll talk a little bit more in terms of the relevance within your own portfolio, and how that can be positioned.

[THE CASE FOR FACTOR INVESTING: ACADEMIC RESEARCH ON FACTORS]

So now I'm going to turn to the case for factor investing. This slide Academic Research on Factors, I mean, you don't necessarily, you know, have to take the ETF manufacturer view or investment company for that matter. You know, we've all been using factors for a long time. But there has been a lot of academic research on factors as well. So just want to highlight a couple of for you in this table.

And the key message to you is even though Multifactor ETFs have kind of burst onto the scene, you know, within the last, say, three to four years, factors themselves have been around for a very long time, you know, just to highlight value. For example, you know, Benjamin Graham was talking about value way back in 1934 when he was saying that investors should be buying stocks, like, at a discount to their intrinsic value or to buy them with a margin of safety.

Momentum, we've had, you know, more recent research, like, going back to the 1993. These would be stocks that would be defined as, you know, strong recent price performance usually defined over the last 12 months or so and with the belief that they would continue to outperform in the future. So all of these factors have a lot of academic research behind it, a lot of the investment practitioners have been using factors in their own portfolios for many, many years since the 1970s.

It's just been, you know, with the advent of the ETF wrapper, and the technology that we have behind that, you can actually package up these kinds of strategies into an ETF and kind of bring them into the market at a much lower cost. But this slide kind of nicely summarizes that each of these factors has been thoroughly vetted by academic research. And probably more importantly, when you look at the behavioral-based theory as to why these factors have had returned premiums over the market, there's a logical explanation for that.

And I think that kind of bodes well for future performance in terms of factors as well. Like, over the long term, they should continue to outperform the market. But as I talked about, there's a lot of individual cyclicality when you're looking at individual factor performance as well.

[FACTOR PHILOSOPHY/APPROACH]

So the next slide in terms of philosophy or approach to having factors in your portfolio, you know, focus on the factors that have the academic research behind them that are robust, and they're expected to outperform in the future so they're persistent. And they're pervasive kind of work among different markets no matter, you know, for an Asia, Europe, or North America, and I'll talk a little bit about that as we go through the presentation as well. So at the end of the day, I think there's about five factors that pass the test, so to speak, and those are value, momentum, quality, low vol, and I would add both sides to that as well. And the good thing is investors when you look into the Canadian market for ETFs, these are really the five factors that most ETF manufacturers focus on in their multifactor product as well. So in terms of philosophy, like diversification is key, I mentioned that each factor, you know, they do have outperformed the benchmark over the long term, but the short term results can be volatile and hard to predict.

So when you're buying into multifactor, I think that's the key message diversification, and then the active returns of the single factors can have low correlations among each other. So when I look at those value and momentum come to mind, that would be low correlation relative to each other. So really, no matter what time we are within the economic cycle, it's unlikely that multiple factors will be outperforming at the same time.

This kind of makes sense if you have exposure to four to five different factors in the portfolio. You know, when one is doing strong, it's probably likely that one wouldn't be doing, you know, as great on a performance as well, that means you're diversifying across multiple factors, you're kind of smoothing out the ride over the long term without reducing long term outperformance potential. So I really think these four points here really the key to, you know, the factor philosophy and approach and why you would potentially want to consider them within your portfolio.

[REPRESENTATIVE EQUITY RETURN FACTORS CAN BE USED IN ISOLATION OR COMBINATION]

The next slide, it kind of drills down a little bit more in terms of the rationalization for each of the factors. We can all go out, there's, you know, like I said, 750 ETFs alone in the Canadian market. Each of these factors, you know, we've identified on this slide. There's actually an ETF in Canada today that you could go out, and you could buy these ETFs and get the individual factor exposure. Obviously, the market itself, you know, the rationale or stocks have earned returns exceeding those of bonds and cash.

They cannot go out and buy Canadian equity and US equity at probably, you know, five to six basis points today. So it's probably, you know, the market data in your portfolio. And then the point I want to highlight there is, you know, what multifactor is doing is it's combining these individual factors into one portfolio to exploit more than one premium in an integrated investment approach.

I look at it really is no difference in the balanced fund at the end of the day or the balanced fund, obviously, combines, you know, equities, fixed income, and cash, kind of blends into the matter to, you know, give you a good return, a good risk adjusted return over time. And the multifactor is doing, you know, to use the analogy of a balanced fund, it's just providing you with individual equity factor exposures in one portfolio, over time, that should give you a smoother ride than going out and buying any one of these individually in your portfolio.

[FACTOR DIVERSIFICATION]

The next slide, it's a little bit the same of the previous slide, but it kind of just highlights, you know, the four factors again and defines what they are. You know, value, obviously, is the one factor, probably most of us on the call might be the, most familiar with. It looks at undervalued stocks, and tends to perform well during economic expansions. And really, it's all about expectations there at the end of the day.

Like I think, we've all seen a stock or perhaps even own a stock in our own portfolio that, you know, came out with what we thought were exceptionally good earnings, but we saw the stock decline significantly. And that's because, for example, if they came up with $1 earnings, but the market was expecting $1.10, then I really going to react well to that news. Value on the other hand, the bar is set kind of low there.

You know, for example, if, you know, the market's expecting one cent earnings per share, and they come out at two cents, stocks obviously going to outperform as that new news gets reflected into the stock price. So really just want to put those factors again on the one slide and really reinforce that, you know, each factor has been extensively vetted in academic research. And it's been studied by both academics and investment companies. It's been studied for, you know, efficiency in the markets. It works, whether we're in North America, Europe, Asia, you know, value performs well in each of those markets over time. And then the behavioral reasons that I outlined on a previous slide kind of bode well there for future performance as well.

[THE INVESTMENT CASE FOR MULTIFACTOR]

So I'm going to shift a little bit and drill down like we talked a little bit about the individual factors on the previous slides and kind of the investment rationale for that. I want to turn specifically to multifactor funds.

[THE CASE FOR MULTIFACTOR FUNDS]

The case for multifactor funds, I mean, it really bodes down to diversification, diversification, diversification. I mean, if you're going to own the multifactor in your portfolio, those are really the reasons. I mean, I explained that factors are very cyclical and they can experience their own unique cycles. You know, if you are looking at individual factor performance in the US at the end of December 2018, you know, value severely underperform the other three factors in the US.

Think about that for a second, like, if you do think value is, you know, attractively valued and you want to add that into your portfolio as a position to kind of, you know, extract those future potential returns, would you really have the, you know, discipline to hold that over a 10-year period? Perhaps some of you could but, you know, at the end of the day, like timing factor performance is very difficult to do. So, you know, I think that's a key point with multifactor. I mean, you're going to get value exposure within a multifactor fund in a smoother ride over time.

You know, I just focused on four or five factors today, but there's literally hundreds of individual factors. And, you know, one academic has actually identified 600 of them, though few were being, you know, widely accepted as being credible. So 600, but we're really saying at the end of the day that, you know, the ones that really pass the muster, so to speak, are those five that I referred to earlier. You know, at the end of the day, these are the ones that, you know, seem to work in different markets and no matter if you're looking at Canada, US, Europe, Latin America, Asia Pacific, and there's very good reasons why I think those will continue going forward.

[FACTOR PERFORMANCE CAN BE CYCLICAL IN NATURE]

Now the next slide is I want to quantify that for you, you know, in terms of this one here focuses on the Canadian market, the S&P/TSX Composite Index. You know, we've done a lot of work here, CIBC Asset Management and CIBC World Markets. And this slide just by way of explanation is how we've looked at certain strategies ourselves and this is the performance of an equally weighted like 30 stock Canadian portfolio and it looks at those factors four factors I referred to earlier and assumes that, you know, the portfolios are balanced on a quarterly basis.

And the way that I think interpret this particular chart is you kind of look right in the middle and, obviously, these returns are relative to the S&P/TSX composite. So obviously, if you look at 2018, you know, an equal-weight portfolio of these factors would outperform the TSX itself by 1%. But I think the key point that you kind of take a step back and you look at, you know, this quote chart, a few things become fairly apparent and that is, equal-weight portfolio kind of sits there in the middle. Like, there's a randomness to this slide where, you know, the colors are kind of all over the place. And the difference in any given calendar year, whether, you know, you look back to 2007 to 2018, it can be quite significant in terms of best performing factor and the worst performing factors. In some years, that difference can be, you know, 30% to 40%.

So I think a few things kind of jumped out here that, you know, a multifactor equal-weighted strategy kind of straddles the middle of these charts, kind of takes out that cyclicality in terms of the, you know, not necessarily the worst performer in many years or the best performers. So like a balanced fund, it kind of gets you that, you know, somewhere like to in the middle of the road compared to buying each of these factors individually. So I think this is kind of a key slide. The next slide looks at the same from a US perspective, so we did the same thing, you know, relative to the S&P 500. I think the same story kind of bares itself out.

And I'll talk about certain market environments towards the end of the presentation, where, you know, multifactor, they perhaps might not do as well as a market cap strategy and why, but, you know, the years 2016 and 2017 in particular were very momentum driven type markets where you kind of look at the FANG performance, so your Facebook, Amazon, Netflix and Google's in the world.

You know, if you went back to see, you know, the end of 2016 towards the end of last year, you know, the FANG stocks, and also there's only handful four or five, they actually contributed to over 50% of the S&P 500 return. So it was a very, you know, narrow type market. So those are some of the environments I'll talk a little bit as we go through the presentation.

But I think, like Canada, and the US, I mean, multifactor kind of takes up some of the ups and downs as opposed to investing in individual factors, and obviously, the differences between best and worst performances pretty pronounced on this slide as well. It can be upwards, you know, 40% and same in the given calendar year.

[HOW MULTIFACTOR ETF PORTFOLIO'S ARE CONSTRUCTED HOW ARE FACTORS TYPICALLY DEFINED?]

So the next section kind of moves into multifactor ETFs and how they're constructed. And, you know, I kind of went through this on a previous slide. I think the good thing about these particular factors is, you know, the definitions are fairly similar between different ETF companies. You know, when you look at value, there's only so many ways you can define value.

You know, obviously, the most universal definition would be, you know, you take an investment universe, say the TSX Composite Index, and you essentially rank for value, the lowest for price to earnings, and price to book. So I think most multifactor ETFs kind of use that same definition.

Although some might hone in on say one particular definition, maybe they look at only lowest P/E as opposed to both P/E and price-to-book. So if you're doing your due diligence on multifactor funds, I think that's one consideration that you want to take into account because, you know, if you went back to the beginning of that, you know, passive, and strategic beta, and active fit into your portfolio, you really need to look at strategic beta as an active strategy, you need to do your due diligence and kind of understand how the portfolio is being constructed 'cause seemingly minor differences between different ETF manufacturers can have meaningful differences in terms of risk return in your overall portfolio.

So I just kind of wanted to highlight some of this momentum as I mentioned earlier, and I think the standard definition of that is, you know, one year price return, some manufacturers look at it that relative to a historical volatility, and then they kind of rank based on momentum, low vol, pretty universal that is generally defined as three years historical data, so a sensitivity to overall market movements. And then others look at standard deviation.

So I just want to highlight this to you that, you know, these were the factors, how are they typically defined in the market. If you're looking at, say, a couple of different multifactor ETFs for your portfolio, you might want to look at 'cause these are transparent methodologies, how does ETF manufacturer or the index provider define these as well?

[CONSTRUCTING A MULTIFACTOR PORTFOLIO: INTEGRATED VS ISOLATED APPROACH?]

The other interesting component of a multifactor portfolio is, you know, how do you construct a multifactor portfolio? And there's a couple of different ways to do that. There's what we refer to an isolated approach or a top down approach and what they do, and I can think of Goldman Sachs, for example, in the US. They basically have four different buckets of stocks if you will.

So they'll take one bucket for low volatility, so all those stocks are ranked exclusively on low vol, we'll have another for value and other for quality, obviously, in another form of momentum, and they'll just aggregate those four sub-portfolios into one portfolio. The other way to look at that is an integrated approach where you're basically building the portfolio looking at these four factors on an individual stock basis. So for example, I might have the S&P/TSX composite as my investment universe.

What I'll do is I might screen through liquidity, right? I may come up with, say, the hundred most liquid stocks in the TSX. And then what I'll do is I'll look at each stock of those 100, and I'll look at that stock on all of those different factors. For example, like, BCE, you know, how does it rank on value, quality, momentum, low vol, come up with a composite score. And if it kind of, you know, ranks highly in my universe, I might add that to my portfolio. So those just to compare and contrast, you know, in Canada, most multifactor ETFs do here what's called the integrated approach. In the US, you see more of the isolated approach.

But I think it's still worthwhile if you're doing your due diligence on these products to kind of take a look at that, you know, how are they constructing the portfolio because these do have different intended consequences on your risk and return, and how they're blending their investment universe together. It's kind of like a puzzle. It's not only do you have to have the pieces of the puzzle, but, you know, how do you kind of blend them all together to create a portfolio to meet your intended risk and return objectives. So I think this is kind of a key slide for doing multifactor due diligence.

[METHODOLOGY OVERVIEW - TYING IT ALL TOGETHER]

The other slide here is just tying it all together. I'll spend a couple of minutes on this slide 'cause I think it's one of the key within that. There's obviously many strategies here in the market. I mentioned on a previous slide, there's 60 multifactor ETFs today. I think you're going to see that obviously increase in the future. A lot of traditional mutual fund companies are, you know, getting into the ETF industries now. And these are some of the strategies that seem to be, you know, being launched.

You know, I've seen 20 of these launched over the last year. But it's important to understand the construction methodology, you know, to assess the strengths and weaknesses of the different strategies. If we're all buying an active fundamental mutual fund, you know, we're doing our due diligence on that, we want to know, you know, what the manager's philosophy is, obviously, we pay attention to historical performance.

But, you know, it's really the philosophy that manager, how are they gonna add alpha over the long term, and how do they construct the portfolio, how do they control for risk? It's no different with multifactor. So the framework, I think you would all find useful when you're doing your due diligence is, you know, what is the ETFs selection universe? You know, is it a very broad universe? Is it just predominantly large cap? Does it have exposure to large, mid, and small, which would be able, you know, to help it outperform that index over the long term?

What factors does the ETF target? Is it the four that I mentioned on the previous slide? Or could it be instead of say, low vol, do they do size instead of the low vol? So just to make sure that you're kind of aware of what the factors that that particular ETF is targeting, you know, how do they measure or define their targeted factors. I kind of mentioned the definitions of each but, you know, maybe just pay attention to, you know, how they're defining that, is it broad? Is it narrow? Does that help them, you know, target particular stocks to meet the investment objectives of the fund? And then how do they combine those factors? And that would kind of go back to my isolated versus integrated approach. And then how aggressively do they pursue its targeted factors.

So that's the framework. I would suggest you kind of look at these, the lens of these products under and that actually leads to questions on the right side of the chart. And I'll just point out a few that I think are pretty important. And one of them is are there any controls for portfolio turnover in the fund. Now when you look at a lot of these strategies, you know, they're typically been backtested through history.

And there's an old adage that there's really no backtest, you know, that looks bad over history. But the reality is, it's one thing in theory to have a multifactor ETF but how is it traded in the real world, you know, if you're are paying low management fee, but your manager is incurring a lot of trading, you know, expenses, you want to be aware of that. So, you know, look at the rebalancing frequency, and most of them do semiannual or quarterly rebalance.

But look for buffer zones around rebalancing. And buffer zones, I kind of think it ties back to these methodologies being transparent for one. So if there's a methodology document, it would kind of outline what that is. So what I mean by rebalancing is if I had 100 stock portfolio and, you know, I kind of re-ranked those particular stocks on my quarterly rebalance, and one of them, you know, just fell outside the zone, like maybe it was 100 and it fell to 103 on my ranking, and I would sell it out of the portfolio, and maybe it ranks higher the next quarter and I would buy it back into my portfolio. What a buffer does at the end of the day is it allows that stock to, you know, kind of go down to rank 103 and still continue to be held in the portfolio.

And really the reason why some managers do that is to mitigate unnecessary turnover. So I think that's an important point I'd like to stress today. And then how the specific stocks risk manage within the portfolio, like, how does a manager reduce idiosyncratic or individual stock risk? I think a lot of the multifactors like equal-weight, their portfolios and by equal weighting, you basically default to having, say, somewhat smaller cap exposure than you were versus market cap. So I think those questions and the impacts are, you know, closely related to each other that you want to be aware of doing due diligence on multifactor.

[INCORPORATING MULTIFACTOR INTO YOUR PORTFOLIO]

So incorporating multifactor in your portfolio, we've kind of gone through the methodology, some of the criteria that you should look at.

[HOW CAN INVESTORS USE MULTIFACTOR ETFs]

And I think there's really two ways that you could use multifactor in your own portfolio, obviously, as a core holding in an actively managed portfolio. And then you can also use it alongside a passive ETF to perhaps introduce the potential for out performance. And that kind of goes back to the slide where I had within the circles, you know, passive, strategic beta and active, you know, you're holding... You know, don't get me wrong, I'm a fan of that, of holding Canadian equity market cap at six basis points.

You know, what is this multifactor ETF bringing to the table for me in my portfolio? And probably just as important, what is its cost? What is its incremental cost over standard market cap index? I think those are important points for consideration. So really, you're looking for alpha here at the end of the day, like performance over an index. So if you're already blending active and passive allocations in your own portfolio, you have, you know, your active mutual funds and you're owning some of these low cost passive allocations, I think a multifactor ETF can perhaps fit nicely into your portfolio and provide another tool to capture out performance while remaining cognizant of its incremental expenses.

Now at the end of the day, I mean, everyone listening possibly is a do-it-yourself investor. But what I thought was interesting is FTSE Russell which is a big index provider globally. They put out an annual smart beta survey. And what I thought was interesting for the 2018 survey that recently came out was the Canadian advisors that they spoke to in Canada. So they probably talked to a sample of 100 plus Canadian financial advisors and said, "Hey, you know, what's your expected usage of strategic beta? Are you using it today? Do you feel that you'll be using it in the future defined as, you know, of the next one to three years?"

And interestingly 54% of Canadian advisors expect their use of strategic beta to increase over that timeframe. So I think that obviously kind of bodes well for, you know, future growth in strategic beta. Obviously, I've talked about from a manufacturing perspective, we're seeing a plethora of product here being launched into the market. So really, the last couple of points to stress on this slide is, you know, how do investors see strategic beta fitting into their portfolio.

So 80% of them see it fitting into their portfolio alongside active management. So that kind of goes back to, well, if I'm paying, you know, 1% plus for an active fund, you know, what value is that bringing to the table when perhaps I could buy a multifactor ETF for, you know, half the price. So I think a lot of people are looking at it as a compliment in a portfolio to an active manager or even a replacement for what I would call a high cost active manager. And 43% see it's sitting alongside passive management, sitting along passive management in the sense that, you know, maybe they might put a small allocation into a multifactor ETF that potentially could outperform my passive exposure over time.

So those are kind of the usages that we see in here. And then with multifactor, unlike single factors, you know, I might want to go into value 'cause I think my outlook for value myself is good over the next year, it's more of a tactical call to an already well-diversified portfolio. But with multifactor investors seem to be looking at it as more of a strategic allocation. And I would tend to agree with that as well.

[MARKET SCENARIOS THAT CAN IMPACT MULTIFACTOR PERFORMANCE]

So market scenarios that can impact multifactor performance. So, you know, I've been mentioning as we go through the presentation, the key point is, obviously, factors, like anything really can go through a period of underperformance versus a cap week benchmark, and some factors that can have a longer cycle, performance cycle than others. So I just want to put together a few environments to kind of discuss with you.

And even a market cap index has its performance, you know, and periods of underperformance. And we can all agree that at certain points, you know, the market tends to over and undershoot, and a classic example of that would be, say, 1999 when we were in, you know, a pretty good momentum market. And you look at the S&P 500 back in 1999, you know, only 38 companies in the S&P 500, you know, they contributed the half the returns in that market environment back in 1999.

So then obviously that performance, you know, when we look back in the tech bubble burst, we saw the market significantly decline as a result of that. So when you look at multifactor, you know, you look at some of the criteria that I put into the chart here, you know, that was one of the points that I made that, you know, market cap weighting favoring large cap within the reference index. And we tend to see multifactor underperform, especially if it equally weights its stocks.

Obviously, multiple factors performing well in the given year, let's say all four factors for whatever reason had a pretty good year, also the chances of multifactor outperforming a single factor in that particular year are pretty high. So this kind of gives you an idea, like, in terms of the different market environments where a multifactor would typically outperform or underperform, but the key is there's no silver bullet with multifactor. It's still going to have those, you know, periods of underperformance as well. But I think the key point is, you know, it can be a good diversifier for your portfolio.

[KEY TAKEAWAYS]

So went through a lot today. Obviously, a lot of the, you know, academic research history behind the factors. But if I had to summarize, you know, the presentation, couple of key takeaways for you there. We've obviously seen a surge in multifactor new products, you know, more than 20 have launched since 2017. I mean, I mentioned there were 60 but, you know, more than 20 have launched in the last year. That trend's going to continue. When you look at the potential benefits of holding multifactor ETFs in your portfolio, it's the possibility of access returns to kind of point out the academic research has shown factor can outperform the broad benchmark over the long-term. You're getting a diversified exposure here with multifactor.

We've talked about large deviations and individual factors year to year, I think those two quote charts in the middle of the presentation kind of bore that out. And probably the most important thing about multifactor is it can instill important behavioral traits in investors. I mean, I reference like, would we all have the, you know, wherewithal to hold value in a 10-year period when it was outperforming. Some of us potentially could, but a lot of us probably couldn't.

So multifactor, you know, gives you that diversified exposure and it allows you to focus on long-term returns instead of chasing like individual short-term performance. And the last point I'd like to leave you today is, you know, we kind of went through that funnel chart in terms of product due diligence, really understand how your multifactor product is constructed, how it's designed, how it can fit into your portfolio.

And be very cognizant of costs, I mean, what you get in relative to going out and buying, you know, US equity, you know, six, seven basis points and Canadian equity at five basis points. You know, do you really want to be paying like 80, 90 basis points for a multifactor? If you do, it's obviously you want to do your due diligence on that particular product and take that into consideration. So I think that concludes the formal part of my presentation at this point, which is now to open up the lines and take any questions you may have.

[QUESTION & ANSWER]

Well, thank you, David, for your insightful presentation. So David is reviewing some of the questions. I wanted our audience who joined in later to know you can type your questions in the Q&A panel located on the right hand side of your screen. If you wish to review this webinar again, a link will be emailed to everyone that registered for this webinar. Also I would like to request the audience to ask questions more explicit to today's topic on multifactor ETFs, and to avoid asking questions that are specific to a security or a company. Well, we have some great questions coming in. So let me pass this to David now. Okay, let me do this.

Oh, I think, I see we got a question coming in and it's about, "Can you provide some examples of top performer in multifactor ETFs?" Good question. And thank you. You know, when you kind of look at the market in terms of multifactor, a couple of different, you know, companies, I got to suggest that you kind of take a look at is, you know, Templeton and Manulife are big in terms of multifactor. So, you know, they have different exposures, whether it's Canada, US international and emerging markets. So if you're kind of looking for like a screen in terms of performers, those would be some of the, you know, the companies that would likely come across in terms of performance.

Thank you very much, David. It looks like that's all the time we have for today. I'm sure I speak on behalf of the entire audience that I thoroughly enjoyed listening to your insights. And thank you for such a wonderful presentation. So if you have any questions or comments, please visit the Investor's Edge website or please feel free to get in touch with us by phone, live chat, or email.

[THANK YOU]

Thank you so much for joining us today.