Trying to find some sort of magic bullet by blending factors is something we have toyed around with a little bit. I'm convinced there is some sort of blend out there that would be optimal but we haven't found it yet. Maybe value, quality and momentum is it.
We use SPMO for momentum here and Copilot suggested SPHQ for quality and SCHD for value. The prompt for SPHQ was to ask for quality factor funds that actually differentiate from market cap weighting and have at least an eight year track record. iShares Quality (QUAL) for example doesn't differentiate. Copilot included SCHD in the the result for value funds, it thought SCHD would be the best value fund. I suppose it's value-ish?
My first thought was to just equal weight the three. Copilot suggested 30% to SPMO and 35% each to the other two. PRF is a Research affiliates multi-factor ETF that has been around for awhile. Multi factor isn't quite right, it screens for book value, cash flow, revenue and dividends.
PRF does its own thing. I've never been a fan of this one but there have been periods here and there where it has outperformed. There's not much differentiation from either version of the SPMO/SPHQ/SCHD combo versus the S&P 500 until mid 2022. That year both versions were down about 9.5% versus 18% for the S&P 500. PRF was down 7% that year.
The portfolio stats range from incrementally better than market cap weighting to noticeably better but hard to say that it is a magic bullet.
The SPMO/SPHQ/SCHD combo has 28-29% in tech plus communications so as we've been talking about the last few days, if something terrible happens to the market and it starts in tech/communications then this combo has a chance of holding up better.
It turns out there is an ETF that blends these three factors without adding the complexity of trying to rotate factors in any way. The Invesco S&P QVM Multi-Factor ETF has symbol QVML. Copilot says QVML equal weights the three factors so this next one compares QVML to our do-it-your self equal weight version and the S&P 500.
QVML has been incrementally better than the S&P 500 but just slightly and the do-it-your self has been slightly better than QVML.
It looks as though QVML has a combined 46% in tech/communications.
Uh oh.
Where our conversation has pivoted to how to avoid the full brunt of a tech meltdown in a portfolio that is heavy in market cap weighting, it's not clear to me that QVML can possibly do that with the huge weighting to tech and communications as well as the overlap in the top ten. in 2022, QVML was down 16% versus 18% for the S&P 500 and 9% for the do-it-yourself version. QVML might do well in a tech meltdown but building it yourself looks like it would be more robust.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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