Multifactor Funds: An Early (Bearish) Assessment

Abstract

Multifactor funds, which offer risk factor diversification, have several appealing characteristics. They enable investing in factors, which has become a typical way to enhance a portfolio’s long-term risk-adjusted return; they provide exposure to more than one factor, which enables diversification; and they offer these benefits neatly packaged in one product. What’s not to like? Their performance. Although their track record is limited, the current evidence on multifactor funds targeting the U.S., global, international, and emerging markets shows that these products have largely failed to outperform market-wide, cap-weighted indexes, or low-cost ETFs that track them, in terms of return, risk-adjusted return, and downside protection.

Keywords: Factor investing, multifactor funds, value, size, quality, momentum, low vol

JEL Classification: G11