Multifactor Funds vs. Homemade Factor Diversification Strategies

Abstract

Multifactor funds, which offer factor diversification neatly packaged in one product, have a rather short but poor track record; these funds have largely underperformed widely-available broad market funds. This article evaluates the performance of multifactor funds relative to two homemade factor diversification strategies, which simply combine single-factor funds in a portfolio. The results here, which reinforce previously-reported poor results, show that multifactor funds largely underperformed both homemade strategies in terms of return, risk, risk-adjusted return, and downside protection.

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

JEL Classification: G11