ETF Specialist

Balancing Targeted Bets With Diversification

Adam McCullough, CFA

Multifactor funds earn their keep by diversifying bets across factors that enhance portfolio return or reduce its risk. Similar to stock market sectors, different factors perform better than others during the market cycle.  IShares Edge MSCI Multifactor USA ETF (LRGF) is a good pick to spread factor bets among U.S. stocks. The exchange-traded fund's low fee and stringent risk management should contribute to its edge over the long run, but it has a short live track record. It earns a Morningstar Analyst Rating of Bronze.

LRGF seeks to maximize its exposure to stocks with attractive value, momentum, small size, and quality characteristics while matching the risk level of the market-cap-weighted MSCI USA Index. This strategy has delivered stronger value and mid-cap tilts than many of its multifactor peers. It aggressively pursues its targeted factors and has a higher active share than many other multifactor strategies. This strategy further strengthens its style tilts by considering its holdings' factor exposures holistically rather than mixing stocks that score well on different individual factors, which can dilute the portfolio's factor exposures. This integrated approach should slightly improve LRGF's return potential. Although it lands in the large-cap value Morningstar Category, it has performed more like a mid-cap value fund.

Adam McCullough, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.