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3 “Smart” Ways to Implement Strategic-Beta Strategies in Portfolios

September 2017

Things to consider when implementing factor-based investing strategies in client portfolios.


A virtual reality revolution is here. From entertainment to education and everything in between, this immersive technology has the potential to make a huge impact. It could one day totally alter how we interact with each other and the world. Yet, despite the constant hype of more affordable headsets hitting the market, most of us just haven’t tried one on—yet.

Like virtual reality, strategic-beta exchange traded funds (ETFs) have the potential to be a game changer. However, some advisors have yet to incorporate them into their practice.

The challenge now for everyone is to better understand how strategic-beta ETFs, such as Hartford Multifactor ETFs, work and how they can complement existing investments (FIGURE 1). Read on for details about three ideas to help you implement them in client portfolios. 

 

Figure 1

ETFWP011_1

Ordinary brokerage commissions may apply. Diversification does not eliminate the risk
of loss. There is no assurance that a fund will achieve its objective.

 

1. Improve International Diversification

What would have happened if an investor skipped rebalancing over the past decade? Over the past 10 calendar years, the S&P 500 Index outperformed the MSCI ACWI ex USAA Index by 5.53%.2 A hypothetical portfolio of 65% US stocks and 35% international stocks would now be allocated 76% to US stocks.Some investors who want to rebalance may consider harvesting some gains from US stocks and reallocating them abroad. This may provide increased diversification and upside potential. The Hartford Multifactor Developed Markets (ex-US) ETF (RODM), Hartford Multifactor Global Small Cap ETF (ROGS), and Hartford Multifactor Emerging Markets ETF (ROAM) all have lower price/earnings (P/E)3 ratios than their reference benchmarks (FIGURE 2). In addition, these ETFs seek to invest deeper into the international equity universe than their reference benchmarks, which are generally concentrated in the largest countries. Incorporating them into portfolios may help improve international diversification.

 

Figure 2

Compelling Valuations

P/E Ratios as of June 30, 2017

ETFWP011_2

Source: Bloomberg, Hartford Funds analysis as of 6/31/17; holdings and valuations are subject to change. Indicies are unmanaged and not available for direct investment. Diversification does not eliminate the risk of loss. For illustrative purposes only. Past performance is no guarantee of future results. 

 

2. Reduce Portfolio Volatility

A portfolio that’s allocated 60% to stocks and 40% to bonds has historically helped mitigate portfolio volatility.4 But with interest rates starting to rise from historic lows, bond volatility could be higher going forward.

The unique indices Hartford Multifactor Low Volatility International Equity ETF (LVIN) and Hartford Multifactor Low Volatility US Equity ETF (LVUS) seek to track are designed to help lower volatility. By focusing on low-volatility stocks and diversifying across their respective company and sector universes, while seeking positive exposure to risk/return drivers, the funds’ indices aim for up to 25% less volatility than their capitalization-weighted universes (FIGURE 3).

Consider LVIN and LVUS for clients seeking lower volatility in their portfolios. This may increase diversification and potentially help reduce volatility.

 

Figure 3

Potential Volatility Reduction

ETFWP011_3

Source: Bloomberg and Hartford Funds. There is no assurance that a fund will achieve its objectives. Diversification does not eliminate the risk of loss.

 

3. Incorporate a Nontraditional Income Source

Advisors may want to consider nontraditional sources of income in their clients’ portfolios, particularly ones that may be better suited to a rising-rate environment.

Stocks of real-estate-investment trusts, or REITS,5 have historically provided strong performance during periods of rising rates.6 Hartford Multifactor REIT ETF (RORE) is the first US-focused REIT ETF that places risk and growth potential at the forefront of an investment design with a multifactor approach. RORE seeks to track an index that invests deeper into the opportunity set in its pursuit for quality and growth potential (FIGURE 4).

Both traditional market-capitalization-weighted ETFs and strategic-beta ETFs can help investors grow their wealth and provide income. Take a look to see where it’s appropriate to implement a strategic-beta strategy to help improve your clients’ experience and potentially enhance their future returns.

Whether your client’s objective is to improve diversification, lower volatility, or find a nontraditional income source, Hartford Multifactor ETFs can help.

 

Figure 4

ETFWP011_4

As of 6/30/17. Data Sources: MSCI, Bloomberg, and Hartford Funds. Percentages may be rounded. Holdings are subject to change. Current holdings information for RORE may be viewed here.


1 Active share is the percentage of a portfolio that differs from a benchmark index. High active share indicates a high degree of active management.

2 Source: Morningstar, 6/17, Performance data quoted represents past performance and does not guarantee future results. For illustrative purposes only. Past performance is no guarantee of future results. The performance shown is index performance and is not representative of any fund’s performance. Indices are unmanaged and not available for direct investment. For illustrative purposes only.

3 Price/Earnings is the ratio of a stock’s price to its earnings per share.

4 Source: Morningstar, 6/17. The volatility of a 60/40 portfolio was 9.2% (as measured by standard deviation, which measures the spread of data around the mean value) over the past 10 years versus 15.2% for a 100% equity portfolio.

5 REIT stands for Real Estate Investment Trust and is a company that owns or manages income-producing real estate. REITs are dependent upon the financial condition of the underlying real estate. Risks associated with REITs include credit risk, liquidity risk, and interest-rate risk.

6 Source: Morningstar, 6/17. We defined past periods of rising rates by a 20% change in treasury yields.

A S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

B MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 developed markets (excluding the US) and 24 emerging markets countries.

C MSCI USA Small Cap Index is designed to measure the performance of the small-cap segment of the US equity market.

D MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the US market.

E MSCI World (ex USA) Index captures large and mid cap representation across 22 of 23 developed market countries, excluding the U.S.

F MSCI ACWI Small Cap Index captures the small cap representation across 23 developed markets and 24 emerging markets countries.

G MSCI Emerging Markets Index captures large and mid cap representation across 24 emerging market countries.

H MSCI USA Investable Market Index is designed to measure the performance of the large-, mid-, and small-cap segments of the US market.

I MSCI REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI) its parent index which captures large-, mid- and small-caps securities.

Indices are unmanaged and not available for direct investment. 

Investment Objectives: Hartford Multifactor Emerging Markets ETF (ROAM) seeks to provide investment results that, before fees and expenses, correspond to the total return performance of Hartford Risk-Optimized Multifactor Emerging Markets Index, which tracks the performance of emerging market equity securities. Hartford Multifactor Developed Markets (ex-US) ETF (RODM) seeks to provide investment results that, before fees and expenses, correspond to the total return performance of the Hartford Risk-Optimized Multifactor Developed Markets (ex-US) Index, which tracks the performance of companies located in major developed markets of Europe, Canada, and the Pacific Region. Hartford Multifactor Global Small Cap ETF (ROGS) seeks to provide investment results that, before fees and expenses, correspond to the total return performance of Hartford Risk-Optimized Multifactor Global Small Cap Index, which tracks the performance of small cap companies in the US, developed, and emerging markets. Hartford Multifactor REIT ETF (RORE) seeks to provide investment results that, before fees and expenses, correspond to the total return performance of Hartford Risk-Optimized Multifactor REIT Index, which tracks the performance of publicly traded real estate investment trusts (REITs). Hartford Multifactor US Equity ETF (ROUS) seeks to provide investment results that, before fees and expenses, correspond to the total return performance of Hartford Risk-Optimized Multifactor US Equity Index, which tracks the performance of publicly traded large-cap US equity securities. Hartford Multifactor Low Volatility US Equity ETF (LVUS) seeks to provide investment returns that, before fees and expenses, correspond to the total return performance of Hartford Multifactor Low Volatility US Equity Index, which tracks the performance of exchange traded U.S. equity securities. Hartford Multifactor Low Volatility International Equity ETF (LVIN) seeks to provide investment results that, before fees and expenses, correspond to the total return performance of Hartford Multifactor Low Volatility International Equity Index, which tracks the performance of companies located in both developed (ex-US) and emerging markets.

Important Risks: All investments are subject to risk, including the possible loss of principal. There is no guarantee any fund will achieve its stated objective. Due to the investment strategy of these funds, they may make higher capital gain distributions than other ETFs. Please read each fund’s prospectus for specific details regarding each fund’s risk profile. Diversification does not eliminate the risk of experiencing investment losses. Common Risks for ROAM, ROGS, RODM, and LVIN: Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Additional Risks for ROAM, ROGS and LVIN: These risks are generally greater for investments in emerging markets. Additional Risks for ROGS: Small-cap securities can have greater risk and volatility than large-cap securities. Additional Risks for RORE: A concentration in real estate securities, such as REITs, may subject the fund to risks associated with the direct ownership of real estate as well as the risks related to the way real estate companies are organized and operated. Real estate is sensitive to changes in interest rates and general and local economic conditions and developments. The fund is nondiversified, so it may be more exposed to the risks associated with single issuers than a diversified fund. Additional Risks for LVIN and LVUS: The funds may experience more than a minimum level of volatility as there is no guarantee that the underlying indexes’ strategies of seeking to lower volatility will be successful. Additional Risks for LVUS, LVIN and RORE: The funds are new and have a limited operating history.

This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice.

ETFWP011    203155    LAT000793    9/15/18