Bloomberg wrote about factor strategies and the ETFs that track those factors. They included this table.
There's a lot here I don't understand. Growth is up a lot more than 1.5%. Whatever they mean by Revisions or Trade Activity, I am not aware of ETFs that track these. If you can figure out what I am missing please leave a comment.
We've looked at factor investing before and as we revisit it today, really this could be Part 2 from yesterday's post about the challenges of being patient.
The first chart compares one popular factor with a multi-factor fund and simple market cap weighted (MCW). Multi-factor has outperformed for the entire study but it's lagging the other two by a lot this year. Momentum is the laggard for the entire period but this year it is up almost double MCW and about 4x multi-factor. None of these, or any other factor you might be interested can always outperform but they are still valid strategies.
One of the worst investor behaviors would be to chase the heat of momentum upon seeing it has had a terrific six month run to start this year. If you dig in to enough factor funds, I think you'd find many terrific runs that were then followed by underwhelming results. But they were just as valid when they were underperforming as when they were outperforming.
IVE is the iShares S&P 500 Value ETF and the chart captures a decent stretch where value had a run versus MCW. As you can probably guess, value has been left far behind MCW in recent years. For the last eight years, MCW has almost doubled up the return of IVE. It's not that value is not valid but man, it has been a long time since it did something relatively positive for a sustained period.
Even within strategies, there can be meaningful dispersion. Here are three different multi-factor funds.
For investors who prefer to stick to broad index exposure, I think multi-factor offers the potential for a somewhat differentiated return stream but I do not believe it is realistic to look at several multi-factor funds and choose which will will outperform going forward. I think studying the funds, differences in implementation could be isolated but that is not the same thing as being able to guess which one will outperform.
Here are a couple of different blends compared to 100% MCW.
The dispersion above is a lot less than I was expecting. I don't do a lot with factor funds or multi-factor. I think true diversification is easier to be found using alts with much lower correlations to MCW or in a couple of cases, negatively correlated to MCW. I don't doubt there is a way with factor funds but I haven't found it yet.
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2 comments:
People talk about diversifying across equities as if when equities take a dive they behave that differently. Obviously they don't behave that differently. Though AQR/AA seem to find value and momentum as probably the least correlated. Which does seem interesting.
I will say, personally, I've found long/short equities, trend following managed futures to be the most interesting. I am looking a lot at carry, as well as things that truly diversify.
Also of note are btal, caos, tail risk ETFs as helpful diversifiers to a portfolio.
Roger, what are the things you find interesting (probably a post on its own).
I've tried to be transparent about this. Managed futures, BTAL, merger arb and another alt that behaves very similarly and I've used inverse funds a little more tactically without holding on for an extended period.
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