Investment Strategies

Get the Facts About Factor-Based Indexing

Looking beyond market beta for performance

By: Barry Gordon, President and CEO, First Asset

The exchange traded funds (ETF) industry has been growing rapidly over the past decade, as has investor demand for increasingly new and sophisticated index products to help meet the financial needs of ETF investors.

One relatively new type of ETF investment that looks beyond systematic risk (or beta) to the various other factors that tend to impact relative performance is “factor-based” investing, which has also been referred to as intelligent (or smart) beta. Factor-based investing is based on the notion that factors such as a company’s value, momentum, or size will all have an impact on its risk-adjusted performance. Factor-based indexing is the next generation of ETFs, allowing investment advisors to tilt portfolios toward one or more important factors in an effort to deliver stronger risk-adjusted returns than more traditional, capitalization-weighted indices.

Factor-based investing looks at the many drivers that tend to influence a stock’s risk and return profile. For example, a company’s “value” factor isn’t considered in most passive mandates. But equities with more favourable valuation ratios (such as price-to-earnings and price-to-book) have demonstrated persistent outperformance, particularly when compared to stocks that do not have favourable valuation ratios. Factor-based mandates can be structured to benefit from the potentially higher gains available from those stocks with attractive valuation ratios. Weighing the many considerations when it comes to passive investing, factor-based mandates can take index investing performance to a whole new level, while also potentially lowering risk. Factor-based mandates also tend to maintain weighting restrictions to avoid the overweighting or underweighting of certain investment sectors, providing diversification benefits not available when you simply “buy the market.”

To provide Canadian investors with access to factor-based ETFs, First Asset Exchange Traded Funds launched a series of factor-based ETFs based on Morningstar® Indexes almost two years ago. These Funds include First Asset Morningstar Canada Momentum Index ETF (WXM), First Asset Morningstar Canada Value Index ETF (FXM), and First Asset Morningstar Canada Dividend Target 30 Index ETF (DXM). In October 2013, First Asset launched the US equity factor-based ETFs: First Asset Morningstar US Momentum Index ETF (YXM) and First Asset Morningstar US Value Index ETF (XXM).

The value and momentum factor-based Funds – including FXM and WXM– have been extremely popular in Canada and were among the strongest-performing mandates in the Canadian equity category over 2013. All of First Asset Exchange Traded Funds’ factor-based ETFs – which come in both currency, hedged and unhedged versions – aim to replicate Morningstar Indexes that leverage CPMS investment strategies. CPMS is Morningstar’s proprietary equity research platform that integrates fundamental, estimate and technical data, as well as economic and commodity data, for over 4,000 Canadian and U.S. companies.

At First Asset Exchange Traded Funds, we aim to deliver better risk-adjusted results through our factor-based indexing approach, and our factor-based ETFs’ performance thus far has been as strong as we had expected. By leveraging Morningstar’s CPMS methodology, First Asset has created ETFs that capture value and momentum effects for Canadian investors. These professional portfolio management solutions were available to only a few individuals just a few years ago. Our leadership and success in factor-based indexing over the past two years should open the door to additional ETF options across other asset classes that can benefit from factor-based analysis.

Originally featured in ETF Watch Magazine

To learn more about the benefits of factor-based ETF investing and First Asset Morningstar ETFs, please contact First Asset Exchange Traded Funds at 1.877.642.1289.

1. Top performing Canadian Equity Funds-Source: Morningstar. FXM & WXI’s Morningstar performance rankings are solely based on 1 year total return performance as at Dec. 31, 2013, in the CIFSC Canadian Equity category for ETFs, which has 31 funds in the ETF group.  FXM & WXM’s performance: 1 Yr - 26.38% and 25.97%, since inception: 21.22% and 19.16%, respectively. FXM & WXM inception date is February 13, 2012. Performance shown is for the common units of the Funds. The Fund's performance is subject to change every month.

This communication is intended for informational purposes only. The Funds are offered by prospectus. Individuals should seek the advice of professionals, as appropriate, and read a Fund’s prospectus prior to investing. Copies of the prospectus may be obtained from your investment advisor, First Asset or at www.sedar.com. Commissions, trailing commissions, management fees and expenses all may be associated with an investment in ETF Funds. ETF Funds are not guaranteed, their values change frequently and past performance may not be repeated. The opinions contained in this article are solely those of First Asset and are subject to change without notice. First Asset is under no obligation to update the information contained herein. The information should not be regarded as a substitute for the exercise of your own judgment.

Morningstar® is a registered trademark of Morningstar, Inc.  Morningstar Indexes have been licensed for use for certain purposes by First Asset. Morningstar, Inc. does not sponsor, endorse, issue, sell or promote the First Asset ETF’s noted, makes no representation regarding the advisability of investing in those ETFs and bears no liability with respect to that security or any other security linked to Morningstar Indexes.  Morningstar Indexes cannot be invested in directly. The past performance of Morningstar Indexes is not a guarantee of Index’s future performance results. 


Important information about each First Asset ETF Fund is contained in its respective prospectus. Individuals should seek the advice of professionals, as appropriate, prior to investing. This investment may not be suitable for all investors. Some conditions apply. Copies of the prospectus may be obtained from your investment advisor, First Asset or at www.sedar.com. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

The commentaries presented are prepared as a general source of information. They are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. The opinions contained in this document are solely those of First Asset and are subject to change without notice. First Asset assumes no responsibility for any losses or damages, whether direct or indirect, which arise from the use of this information and expressly disclaims liability for any errors or omissions in this information. First Asset is under no obligation to update the information contained herein.