Factor ETFs May Help Clients Mitigate Volatility
For a year that is less than two months old, 2018 is already proving memorable. January gave us record-breaking cold temperatures across much of the United States and Canada, a shutdown of the U.S. federal government, and the beginning of the reappearance of significant market volatility.

January also featured one of the industry’s best forums for education and networking, the Inside ETFs Conference, held in Hollywood, Florida. It was a terrific four-day event that featured some of the best and brightest exchange-traded -fund (ETF) sponsors and strategists in the industry sharing their insights with advisors from across the country. On a personal note, it provided a great opportunity to catch up with so many of you who stopped by the OppenheimerFunds exhibit space at the conference.

As we turned the calendar page to February, the Philadelphia Eagles became Super Bowl champions for the first time and the U.S. government shut down again (albeit only for about six hours). But for those of us in the financial services industry, the most significant development was the dramatic sell-off in the stock market that occurred in early February.

Volatility Takes Toll on Client Portfolios

Concerns about rising inflation and climbing U.S. Treasury yields, coupled with fears that the Federal Reserve would respond by increasing interest rates faster than anticipated, caused the Dow Jones Industrial Average to tumble, and ultimately register the largest single-day point decline in its history on February 5.

This single-day sell-off and the overall volatility that has reemerged have left many investors struggling to regain their sea legs. It also has many RIAs scrambling to respond to calls from frantic clients looking for ways to protect their assets from the impact of the twists, turns, sudden climbs, and steep drops that occur – often on the same trading day – in highly volatile markets.

Consider Adding Multi-Factor ETFs

One possible solution to offsetting some of this volatility is to consider incorporating multi-factor ETFs into client portfolios. Factor investing is quickly emerging as a favored approach to achieving specific outcomes within client portfolios and can help provide:

  • Enhanced diversification and risk management,
  • A rules-based, transparent investment process,
  • Construction of a more dynamic core, and
  • Favorable risk-adjusted, long-term returns.

We all know that, for some investors, the first sign of stock market turbulence triggers a race to safe-haven assets such as cash. Too often, they abandon their carefully constructed long-term strategies and join the stampede for the exits.

However, for clients who want to remain invested in equities, increasing allocations to defensive factors such as quality, yield, and low volatility may offer a good option. These factors tend to outperform the market – and other factors – during periods when volatility is on the rise.

I recommend you take a look at this insightful analysis on how to position investors for volatility by using factors, which details how factors have performed historically during periods of heightened volatility.

To help you better position your clients’ portfolios for periods of volatility, OppenheimerFunds offers a comprehensive suite of factor ETFs, including single- and multi-factor strategies. Click here to learn more and to help educate clients about the factor investing opportunity. I also invite you to visit the OppenheimerFunds factor dashboard, which is updated monthly and provides our latest thinking on factor investing based on economic and market indicators.

In the meantime, as all good sailors – and advisors – know, keep your eyes locked on the horizon. Don’t let your clients lose sight of their long-term goals, and if a course correction is necessary, factor ETFs may provide the stabilizing force your clients’ portfolios need.