Kiplinger’s Personal Finance — September 2017

09/2017 KIPLINGER’S PERSONAL FINANCE 51

The P/E of the ETF’s port-

folio is slightly higher than

that of the S&P 500. The

ETF also looks expensive

on measures such as cash

f low, sales and book value

(assets minus liabilities).

Because of its relatively

lofty valuation, the ETF

may have trouble beating

the market in the near

term. Quality can also

be a drawback when

investors favor

more eco-

nomically

sensitive,

lower-

grade

stocks.

But the

ETF’s long-

term prospects

look solid. The fund

tilts toward companies

with well-entrenched

advantages—those with

hefty financial muscle

and the capability to fend

off competitors over the

long run. Market slumps

shouldn’t drag these com-

panies down as much as

riskier businesses. Some

studies have found that

high-quality stocks tend

to beat the broad market,

too, making this ETF a

reasonable long-term bet.

Vanguard Russell

2000 Value (VTWV, $104)

Assets: $167 million

Expense ratio: 0.2%

1-year return: 25.3%

3-year annualized return: 6.9%

Top three holdings: XPO

Logistics, Olin, New Residential

Investment (as of May 31)

Small-company stocks

aren’t for everyone. Small

caps tend to bounce around

more than the shares of

large companies, making

work over the long term.

Researchers have found evi-

dence of the momentum ef-

fect in markets around the

world, across multiple time

frames. One reason for mo-

mentum’s persistence is

that investors tend to stick

with the same winning

stocks, even if they get

pricey. Whatever the ex-

planation, momentum is

a factor that every

investor should

include in his

or her portfo-

lio, says

Clifford

Asness,

cofounder

of investing

firm AQR Capital

Management,

which specializes in alter-

native strategies.

iShares Edge MSCI USA

Quality Factor (Q UA L , $ 74)

Assets: $3.7 billion

Expense ratio: 0.15%

1-year return: 14.9%

3-year annualized return: 10.5%

Top three holdings: Altria,

Johnson & Johnson, Microsoft

Companies with strong

profitability, clean balance

sheets and steady profits

tend to thrive in the long

run. That’s the thinking

behind this ETF, which tilts

toward large, “quality” U.S.

firms. Tech, health care and

financial services dominate

the roster, led by the likes of

Apple, J&J and Visa. What

you won’t get are many

producers of raw materials,

which are sensitive to eco-

nomic cycles and tend to de-

liver inconsistent earnings,

and utilities, which have

relatively low profitability.

Quality doesn’t come

cheap these days, though.

ally won’t fall as much in

crashes and, thus, have

less to make back when

the market recovers.”

iShares Edge MSCI USA

Momentum Factor (MTUM, $89)

Assets: $3.1 billion

Expense ratio: 0.15%

1-year return: 18.0%

3-year annualized return: 13.4%

Top three holdings: JPMorgan

Chase, Bank of America, Microsoft

Buying this ETF is like hop-

ping aboard a fast-moving

train. The fund emphasizes

companies with rapidly ris-

ing share prices. Stocks on

the upswing usually remain

on that path for long peri-

ods, and this ETF aims to

harness that effect.

Technology stocks, which

account for about 30% of

this ETF’s assets, have been

especially strong in recent

years. Top holdings include

Apple, Microsoft and chip-

maker Nvidia. Banks and

health care stocks are also

exhibiting good momentum

these days, putting stocks

such as JPMorgan Chase

and UnitedHealth near the

top of the fund’s lineup.

A stock’s momentum can

fade as investors rotate into

more-promising areas. This

ETF adjusts its holdings

twice a year to try to cap-

ture these swings. But it’s

an imperfect solution, and

as a result, the ETF will

occasionally lag the broad

market. Moreover, because

of the ETF’s relatively static

nature, it may not adjust its

holdings fast enough after

a bear market ends to fully

participate in the early

stages of a recovery, says

Morningstar’s Alex Bryan.

Nonetheless, the ETF’s

strategy does appear to

wiping out the advantage).
Yet it appears to persist for
the same reasons that value
and momentum investing
keep working. Irrational
as it may be, investors love
risky stocks and tend to
“overlook their stodgier
counterparts,” says invest-
ing firm AllianceBernstein.
Active fund managers often
shun the tortoises, too, con-
centrating on faster-moving
stocks to try to boost their
returns.
This ETF aims to exploit
the paradox by tilting to-
ward less-volatile, large-cap
U.S. stocks. Health care
companies and consumer
products businesses prevail
in the lineup, led by firms
such as Becton Dickinson,
Johnson & Johnson and
Pepsico. Overall, the fund
has been 16% less volatile
than the S&P 500 over the
past three years. Yet it has
outpaced the index by an
average of 2.2 percentage
points per year.
This ETF usually won’t
beat the market in a rally
that favors more growth-
oriented companies. And
if you buy now, you’ll pay
a steep price for safety.
Stocks in its portfolio trade
at nearly 23 times estimated
earnings, compared with 18
for the S&P 500. Nonethe-
less, the fund should hold
up relatively well in a down-
turn. These steady Eddies
“won’t soar as high in bull
markets,” says Alliance
Bernstein, “but they gener-

the market in

term. Quality

be adrawb

invest

mo

no

sen

ETF’

term

hatever the ex

, momentum is

hat every

hould

n his

rtfo-

r

ng

Capital

mentntt

ally won’t fa

crashes and

less to make

the market re

iShahres Edge M

Momentum Fac