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Multi-factor ETFs see inflows after long underperformance

A RAFI Indices analysis says the median multi-factor ETF lagged the S&P 500 by 4.8% annualized over the past decade, but U.S. multi-factor ETF inflows neared $5 billion through June 2026.

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ETF Trends highlights that highly concentrated, capitalization-weighted benchmarks have dominated equity leadership over the past decade, but investor interest in diversified factor approaches is rising again. The outlet points to a RAFI Indices analysis showing that, during the long period of mega-cap growth, the median multi-factor ETF underperformed the S&P 500 by 4.8% annualized, contributing to roughly $763 million in net outflows in 2023.

ETF Trends also reports that the flow trend has reversed in more recent periods. U.S. multi-factor ETFs averaged about $3.8 billion in net inflows across 2024 and 2025, and through June 2026 inflows were nearly $5 billion, putting the category on track for one of its strongest years in recent history.

The RAFI Indices work examined why factor strategies struggled, attributing the issue to portfolio construction during mega-cap rallies rather than factor failure. According to the analysis, cap-weighted benchmarks expand exposure to companies as they surge, while RAFI’s approach requires securities to qualify through factor definitions.

ETF Trends describes RAFI’s RAFI Multi-Factor Index strategy as targeting five empirical return drivers: value, low volatility, quality, momentum, and size. It selects the top 25% of securities per factor and weights them fundamentally rather than by market price, aiming for diversified return drivers with lower excess-return correlations, and RAFI notes that portfolio rules can materially change security weights, such as Intel’s 3.0% weight in the RAFI Multi-Factor U.S. Index.

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