50 KIPLINGER’S PERSONAL FINANCE^ 09/2017
INVESTING
based on measures such as
price-to-sales and price-to-
cash-f low ratios (though its
overall price-earnings ratio
is about the same as the
S&P’s). Overall, the fund
probably won’t deviate
sharply from the market,
says Gray, who is not affili-
ated with Goldman Sachs.
Nonetheless, if you don’t
want to place your own
strategic bets, this ETF
should give you a small ad-
vantage over a traditional
S&P 500 fund. The fund’s
low fees—barely more than
what the cheapest S&P 500
ETFs cost—should help, too.iShares Edge MSCI Minimum
Volatility USA (USMV, $49)
Assets: $13.7 billion
Expense ratio: 0.15%
1-year return: 8.2%
3-year annualized return: 11.8%
Top three holdings: Becton
Dickinson, Johnson & Johnson,
McDonald’s
The more risk you take,
the more money you make.
That’s a basic principle of
financial theory. But it may
not be so ironclad. Compa-
nies with relatively stable
share prices tend to beat the
market over the long term,
mainly by managing to hold
up better in downturns.
Researchers call this an
investing anomaly or para-
dox because the effect
shouldn’t exist once every-
one discovers it (quicklyGoldman Sachs, this ETF
combines four strategies
in one package. Goldman
ranks stocks in the S&P 500
by their momentum, qual-
ity, value and volatility.
Stocks that screen well on
these measures carry more
weight in the fund, with
each strategy accounting for
25% of assets. The results
should be smoother returns
than any one factor is likely
to produce on its own, says
Goldman.
Ultimately,
the ETF,
which
launched in
September
2015, may
help you get
an edge, partly
because you
won’t have to time
your bets. Many
studies find that
investors miss out
on gains because
of bad timing
(buying stocks
after their prices
have run up and avoiding
them after they have de-
clined). This ETF takes the
guesswork out of the pro-
cess. And the fund won’t
cost you much, with a ra-
zor-thin expense ratio.
Granted, this fund isn’t
likely to surge ahead of the
market. In one way its ros-
ter of 450 stocks resembles
the S&P 500, emphasizing
giants such as Apple and
Microsoft. The fund does
grant midsize firms a bit
more clout than an S&P
500 fund does, giving it
an edge if smaller com-
panies vault over the
mega caps. The ETF
also looks slightly
cheaper than the S&P 500to surpass the major indexes.
Some will thrive in strong
bull markets; others should
excel in downturns. For in-
vestors who don’t want to
make timing wagers, we
also profile an ETF that
wraps several strategic bets
in one package. The amount
you should invest in each
fund depends on your appe-
tite for risk. Remember, too,
that patience is key: You
may have to hold these
ETFs for years to reap
their rewards. For a look
at the Kiplinger ETF
20, the list of
our favor-
ite ETFs,
turn to
page 52.
(Prices
and returns are as of
June 30, unless otherwise
noted. For comparison’s
sake, the S&P 500 returned
17.9% over the past year and
9.6% annualized over the
past three. Funds are listed
in alphabetical order.)Goldman Sachs ActiveBeta
Large-Cap Equity
(symbol GSLC, $48)
Assets: $2.2 billion
Expense ratio: 0.09%
1-year return: 15.4%
Top three holdings: Apple,
Microsoft, Johnson & Johnson
One of the big challenges
with strategic ETFs is get-
ting the timing right. Pre-
dicting whether a momen-
tum strategy will take the
lead over one that focuses
on value stocks or high-
quality firms isn’t easy.
And it’s tough to say when
stocks will hit the skids and
stay depressed, making low-
volatility stocks the best bet.
Run by the money-
management division atthe major bogeys. Such ETFs
hold baskets of stocks that
often look very different
from the S&P 500. Some of
these funds focus on shares
of undervalued small com-
panies. Others tilt toward
stocks with upward share-
price momentum, or compa-
nies with high-quality bal-
ance sheets. You can also buy
“low volatility” ETFs that
should hold up relatively
well in a market downturn.
The common theme with
these funds is that they em-
phasize stocks with attri-
butes such as value, momen-
tum or quality. Many studies
have found that stocks with
one or more of these “fac-
tors” tend to produce supe-
rior long-term results
compared with the market
averages. These types of
stocks may deliver only an
extra percentage point or
so of gains per year. But that
adds up if you stash them
away for a decade or more.
Markets tend to favor one
style or strategy for long pe-
riods, so don’t expect these
funds to excel under all con-
ditions. Value stocks, for in-
stance, have trailed growth
stocks over the past decade.
Small-capitalization stocks,
which beat large caps for
much of the 20th century,
haven’t lived up to their rep-
utation as giant slayers for
the past 15 years. “It takes a
long time for a factor to
work, and most investors
don’t have the patience to
stick with it through the
bad times,” says Wesley
Gray, a former finance pro-
fessor who now heads Al-
pha Architect, an ETF spon-
sor and investing firm.
Below are five ETFs that
we like for their potential
le and
nd does
ms a bit
n S&P
ing it
com-
he
TFS&P 500