LRGF: A Promising Multifactor Strategy Worth Shortlisting

seekingalpha07-22

LRGF is a passively managed multifactor ETF that tracks the STOXX U.S. Equity Factor Index.LRGF's returns since the index change in June 2022 have been outstanding, as it has outmaneuvered a few peers...

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Its quality is mostly solid.However, as the ETF has yet a lot to prove, a Hold rating looks reasonable.   Martin Barraud/OJO Images via Getty Images Expanding the universe of multifactor ETFs I cover, today I would like to offer a deep delve into the strategy and portfolio of the iShares U.S. Equity Factor ETF (NYSEARCA:LRGF). After researching its performance and factor credentials using my regular ETF analysis techniques, in part based on the Seeking Alpha Quant data, I would like to conclude that this is a solid candidate for shortlisting. LRGF is in a few ways superior to the iShares Core S&P 500 ETF (IVV), both from a factor standpoint (mainly when it comes to value) and performance. It is also fairly competitively priced, with a wafer-thin expense ratio of 8 bps. Nevertheless, the primary issue I see here is its rather short history with a new index, and the fact that its strategy before June 2022 had a certain overlap with the current one should not be used as a reliable premise for extrapolating performance delivered since its inception in April 2015. That is to say, while there should be no doubt that it does deserve to be on a short list of ETFs to consider, I regard a Buy rating as unjustified. LRGF strategy As we know from the prospectus available on its website, incepted in April 2015, LRGF was initially known as the iShares MSCI USA Multifactor ETF as it tracked the MSCI USA Diversified Multiple-Factor Index. On June 1, 2022, it switched to the STOXX U.S. Equity Factor Index. The index creation starts with large- and mid-cap names from the STOXX USA 900 index. The idea is to apply the \"optimization process\" in order \"to maximize exposure to five target factors: momentum, quality, value, low volatility and size.\" There are other considerations that guide the index calibration process: The Underlying Index also seeks to mitigate exposure to unintended systematic exposures, limit turnover and maintain a level of risk similar to that of the Parent Index. Each factor has a unique ingredient mix. For instance, momentum is based on price momentum, earnings momentum and earnings announcement drift (i.e., the difference between a stock’s performance on and immediately following an earnings announcement date). Quality is assessed using not only profitability metrics but also an ESG ingredient: gross profitability, share dilution, accruals, changes in net operating assets, carbon emissions intensity and greenhouse gas (“GHG”) reduction targets. I recommend referring to pages S-2 and S-3 of the prospectus for more details on the scores' composition. This index is \"reviewed and rebalanced\" each quarter. A few constraints are applied; for example, a single security cannot account for more than 10%. LRGF has outraced the market and its peers since June 2022 Smart-beta vehicles leveraging intricate equity selection and weighting techniques usually struggle to outrace simple, plain-vanilla market-cap-weighted ETFs like those tracking the S&P 500. This was not the case with LRGF. At least since the strategy change in June 2022. Over the June 2022–June 2024 period, LRGF not only outraced IVV but also a few peers, including the Invesco Russell 1000 Dynamic Multifactor ETF (OMFL), the Vanguard U.S. Multifactor ETF Shares (VFMF), the WisdomTree U.S. Multifactor Fund ETF (USMF), and the Fidelity U.S. Multifactor ETF (FLRG).    Metric LRGF OMFL VFMF USMF FLRG IVV   Start Balance $10,000 $10,000 $10,000 $10,000 $10,000 $10,000   End Balance $13,908 $11,862 $12,737 $11,855 $13,231 $13,658   CAGR 17.16% 8.54% 12.31% 8.51% 14.38% 16.14%   Standard Deviation 18.54% 20.58% 21.29% 16.95% 16.64% 18.51%   Best Year 25.87% 21.52% 18.53% 13.46% 18.33% 26.32%   Worst Year -4.75% -5.26% 0.02% -3.90% -2.13% -6.21%   Maximum Drawdown -12.26% -14.22% -11.77% -13.13% -10.93% -12.98%   Sharpe Ratio 0.71 0.28 0.44 0.31 0.63 0.67   Sortino Ratio 1.16 0.45 0.76 0.48 1 1.06   Benchmark Correlation 1 0.91 0.89 0.93 0.98 1   Upside Capture 100.78% 85.88% 87.73% 69.94% 84.56% 100%   Downside Capture 97.27% 110.13% 98.17% 88.15% 85.87% 100%   Click to enlarge Data from Portfolio Visualizer. IVV was selected as a benchmark Over the seven months of the bear market torn 2022, it bested IVV consistently in July–December. Though its performance was a bit softer in 2023 as it was more afflicted by the bank industry turmoil in March (that month, it underperformed IVV by 1.2%) and thus lagged the S&P 500 ETF by 45 bps, it has outperformed IVV in four out of six full calendar months this year. Some momentum has been lost this July, but LRGF is still confidently ahead of the market (proxied with IVV) and the peer group year-to-date. Data by YCharts LRGF is better valued than IVV but lags behind on growth As of July 18, LRGF had a portfolio of 279 equities, with the major holding being Apple (AAPL), which accounted for 6.6% of the net assets. Comparing LRGF's portfolio with that of IVV, I have found out that the S&P 500 constituents account for 85% of LRGF's net assets. Owing to such a substantial overlap, these funds have a lot in common. At the same time, there are numerous differences. More specifically, LRGF has a slight value tilt that comes with a bit less appealing growth characteristics and something to dislike regarding quality. Growth and value IVV and LRGF have fairly similar sector mixes, with IT occupying the top spot. However, the multifactor ETF has a 1% larger allocation to it. Besides, it has a larger exposure to consumer discretionary (+2.2%); it is underweight in communication (-2.9%) and industrials (-1.1%). Other sectors' weights differ by less than 1% (overweight/underweight). In part due to sector exposure differences, IVV has a stronger growth story under the hood.        Metric LRGF IVV   EPS Fwd 16.49% 17.05%   Revenue Fwd 11.26% 11.56%   Quant Growth B- or higher 49.3% 52.5%   Click to enlarge Calculated using data from Seeking Alpha and the ETFs. Financial data as of July 20 The table below illustrates that even though, on average, IT names in the LRGF portfolio are growthier, it made questionable choices in the energy and materials sectors. The weaker average revenue growth rate in the consumer discretionary sector is another detractor. Created by the author using data from Seeking Alpha and the ETFs IVV also leads when it comes to stocks with a B- Quant Growth grade or higher. At the same time, LRGF has more to offer in terms of value as it comes with a bit less compressed weighted-average adjusted earnings yield (as usual, loss-making firms were ignored) than that of IVV. There is a difference in the Price/Sales ratios as well, driven mostly by NVIDIA (NVDA). Exposure to stocks with a B- Quant Valuation rating or higher is also telling.        Metric LRGF IVV   Market Cap $867.43 billion $1,001 billion   P/S 8.31 8.53   Adjusted EY 4.22% 3.62%   NVDA weight 5.9% 6.4%   Quant Valuation B- or higher 11.9% 7.8%   Click to enlarge   Calculated using data from Seeking Alpha and the ETFs Quality Quality-wise, LRGF is mostly on par with IVV. IVV has a slightly larger allocation to stocks with a B- Quant Profitability rating or better, as well as a higher weighted-average Return on Assets. However, its adjusted Return on Equity is lower, and free cash flow-positive companies have a smaller weight in its basket.        Metric LRGF IVV   ROA 13.87% 14.09%   Adjusted ROE 20.79% 19.86%   Quant Profitability B- or higher 93.5% 95%   FCF-positive companies 85.8% 84.6%   Click to enlarge   Calculated using data from Seeking Alpha and the ETFs ROE was adjusted for negative and abnormally high (i.e., above 100%, predominantly driven by hefty borrowings) metrics. Momentum and volatility LRGF has a bit smaller exposure to stocks with pronounced momentum characteristics than IVV. Meanwhile, the weighted-average beta coefficients of their portfolios are on par.        Metric LRGF IVV   Quant Momentum B- or higher 72% 73.5%   24M Beta 1.075 1.079   60M Beta 1.074 1.064   Click to enlarge Calculated using data from Seeking Alpha and the ETFs Final thoughts  LRGF is an interesting multifactor fund with robust performance since the index change, as it has beaten the S&P 500 ETF and a few peers. It has a slight value tilt, with growth characteristics a bit weaker than those of IVV. There is little to criticize about its quality. However, its trading history with a new index is too short. Thus, I believe the Hold rating is optimal at this juncture.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2453173945"}