Factors that matter

Academic research has shown that securities that offer higher expected returns share certain characteristics, or factors.

Dimensional Fund Advisors Canada ULC (Dimensional Canada), who sub-advises Manulife ETFs, leveraged this academic research to identify and isolate those equity characteristics that are true drivers of long-term performance. They have identified four factors worth pursuing in an investment portfolio: overall market, company size, relative price and profitability.

Overall market: The equity difference

The market factor looks at equities relative to bonds. More specifically, it considers the excess return over the risk-free rate* that market participants demand for investing in a broadly diversified portfolio of equity securities. This premium is called the equity premium.

*The risk-free rate is the theoretical rate of return of an investment with zero risk.

Company size: The small-cap difference

The company size factor reflects the excess return that investors demand for investing in smaller companies relative to larger companies. The premium associated with this factor is the small-cap premium.

Relative price: The value difference

The relative price factor reflects the excess return that investors expect to receive by investing in low relative price or value stocks (considered to be undervalued based on their fundamentals) versus high relative price or growth stocks (whose earnings are expected to grow at an above-average rate). This premium is called the value premium.

The profitability difference

Simply put, the profitability factor discerns that if two companies trade at the same relative price, the one with higher profitability should have a higher expected return. The premium associated with this factor is the profitability premium.

Benefits of a multifactor approach

To summarize, Manulife ETFs favour stocks over bonds, small company stocks over large company stocks, value stocks over growth stocks, and the stocks of highly profitable companies over stocks of less profitable companies.

This multifactor approach requires a higher degree of expertise. But history has shown that a multifactor approach tends to yield improved outcomes for investors.

Image of Chart that demonstrates how multifactor approach performs top quartile over time against benchmarks and single factors.

Click here to expand table

This chart is for illustrative purposes only and does not represent the performance of any Manulife ETF. Morningstar, as of 12/31/16. Callan chart is from 2002 to 2016. Size is represented by the Russell 1000 Size Factor Index, which tracks the performance of stocks displaying smaller-size characteristics. Value is represented by the Russell 1000 Value Factor Index, which tracks the performance of stocks displaying lower valuation characteristics. Volatility is represented by the Russell 1000 Volatility Factor Index, which tracks the performance of stocks displaying lower volatility characteristics. Quality is represented by the Russell 1000 Quality Factor Index, which tracks the performance of stocks displaying higher-quality characteristics. Momentum is represented by the Russell 1000 Momentum Factor Index, which tracks the performance of stocks displaying momentum characteristics. Multifactor is represented by the Russell 1000 Comprehensive Factor Index, which combines the performance of all five Russell 1000 factor indexes: size, value, quality, momentum, and volatility. Annual return sare based on calendar years. Indexes are unmanaged and do not take transaction costs or fees into consideration. It is not possible to invest directly in an index. Performance figures assume reinvestment of dividends and capital gains. Certain returns shown may reflect hypothetical historical performance. All performance presented prior to the index inception date is backtested performance. The backtested calculations are based on the same methodology that was in effect when the index was officially launched. However, backtested data may reflect the application of the index methodology with the benefit of hindsight, and the historical calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index. Past performance does not guarantee future results.

“Dimensional Fund Advisors” and “Dimensional” refer to the Dimensional separate but affiliated entities generally, rather than to one particular entity. Dimensional Fund Advisors Canada ULC is the sub-advisor to the Manulife ETFs. Neither Dimensional Fund Advisors Canada ULC nor its affiliates is affiliated with Manulife Investments or any of its affiliated entities. Dimensional Fund Advisors LP receives compensation from Manulife in connection with licensing rights to the Indexes. Dimensional Fund Advisors LP does not sponsor, endorse, or sell, and makes no representation as to the advisability of investing in, the Manulife ETFs.

Commissions, management fees and expenses all may be associated with exchange traded funds (ETFs). Investment objectives, risks, fees, expenses and other important information are contained in the prospectus, please read it before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

Manulife ETFs are managed by Manulife Investments, a division of Manulife Asset Management Limited.

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