iShares Files for Intl Quality and Momentum Factor ETFs

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Sammy_M
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Sammy_M »

They're out...

IMTM, 0.30 ER
https://www.ishares.com/us/products/271 ... factor-etf

IQLT, 0.30 ER
https://www.ishares.com/us/products/271 ... factor-etf

Global Momentum is now quite affordable (MTUM and IMTM) ... and pairs nicely with Global Value.
lazyday
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by lazyday »

The quality index appears to be cap weighted.

Here's year end valuations vs MSCI ex-US:
Div Yld (%) P/E P/E Fwd P/BV
3.12 15.39 15.02 2.45
3.04 16.61 14.12 1.67
These are directly comparable, because the quality index is sector neutral.

High P/B is expected for quality, with high return on assets/equity/etc. Interesting that even with quality becoming more popular, and so much worry over economies, P/D and P/E is cheaper than market. (I ignore forward P/E)

http://www.msci.com/resources/factsheet ... sd-net.pdf
Last edited by lazyday on Sat Feb 07, 2015 6:51 am, edited 2 times in total.
pauliec84
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

I just download the momentum index history from the ishares website (http://www.msci.com/products/indexes/st ... mance.html) and calculated the factor loading data via Ken French Global ex-US factors.

Good news and bad news.

From 1991 to present using Fama French Data

R2 = 0.85
Alpha -0.21 Monthly (~ -2.5 Annually) This is the bad news.
MKT = 0.95
SMB = -0.06
HML = -0.06
UMD = 0.47 (The good news)

So it has a much higher UMD than its US equivelent but a much lower alpha.

Using the AQR Frazzini data which goes back through 1986 paints a much rosier pictures.

R2 = 0.85
Alpha -0.00 Monthly
MKT = 0.95
SMB = -0.19
HML = 0.03
UMD = 0.46 (The good news)

Given this gets some AUM (and gets decent tracking which I think it will), I will add it to portfolio. I have been convinced by Robert T and my own mean-variance backtesting that it makes more sense to get UMD on US side (and where I differ a bit from Robert T is more SMB on International side). However, given much cheaper valuations outside US I think it may make sense to get some UMD for the time being there.
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in_reality
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by in_reality »

Sammy_M wrote:They're out...

IMTM, 0.30 ER
https://www.ishares.com/us/products/271 ... factor-etf
Thanks. I changed over from PIZ (Powershares int MOM) yesterday after seeing your post.

Since the ask was about the NAV as displayed by Morningstar, I figured I was paying fair value. Wow, slowest order fill ever. After a couple minutes though, order fills for exactly 100 shares started coming in ... All at the same exact price ... until the order was filled. Was just about to call and see what the problem was.

Was surprised to see the daily volume move from zero to the number of shares I had just purchased. I just kinda assumed it wasn't being displayed properly in the same way that it seemed like the price wasn't showing in the performance graph (both at Moringstar and Schwab).

It's a lower ER and I didn't want to rack up taxable gains in PIZ waiting for iMTM to grow. Impatient I know...
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Liberty1100 »

ETFs are becoming more and more creative.

How are you using these Momentum ETFs into your asset allocation?
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

Thanks. I changed over from PIZ (Powershares int MOM) yesterday after seeing your post.

Since the ask was about the NAV as displayed by Morningstar, I figured I was paying fair value. Wow, slowest order fill ever. After a couple minutes though, order fills for exactly 100 shares started coming in ... All at the same exact price ... until the order was filled. Was just about to call and see what the problem was.

Was surprised to see the daily volume move from zero to the number of shares I had just purchased. I just kinda assumed it wasn't being displayed properly in the same way that it seemed like the price wasn't showing in the performance graph (both at Moringstar and Schwab).

It's a lower ER and I didn't want to rack up taxable gains in PIZ waiting for iMTM to grow. Impatient I know...
Yes, it is a bit of a dangerous game to buy etfs before they build up AUM. You are making a bet with little upside (satiated impatience) but lots of risks. I am just coming off of a similar mistake buying IEIS (ishares enhanced international small cap), at a considerable costs. Anyway, I will see how long my impatience lasts. It would be nice to get AUM into 50m + range, and some history of the funds ability to track its index.
lazyday
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by lazyday »

SSGA has some new-ish Quality multifactor funds also at ER .3%:
EAFE https://www.spdrs.com/product/fund.seam?ticker=QEFA
EM https://www.spdrs.com/product/fund.seam?ticker=QEMM
See link below for methodology. 1/3 each to Quality/Value/Minimum Volatility.

Surprisingly, some of the country funds are also .3%, though for example the UK fund only has 110 holdings:
viewtopic.php?f=10&t=156891
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in_reality
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by in_reality »

Liberty1100 wrote:How are you using these Momentum ETFs into your asset allocation?
Target is 30% MOM and 70% Schwab fundamental index. (Basically a value tilt that varies the value exposure a bit over time). I've seen this recommended.

Am at 20% MOM though, and don't think I want to go higher. Combined with the fundamental indexes and other holdings such as total index funds with capital gains I have to keep, my 9 box would be tilted to large growth if I went higher.
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

R2 = 0.85
Alpha -0.21 Monthly (~ -2.5 Annually) This is the bad news.
MKT = 0.95
SMB = -0.06
HML = -0.06
UMD = 0.47 (The good news)
I just checked to see if the high momentum load for the international MSCI momentum fund was time dependent as the US fund only has a ~0.30 momentum load.

When the US fund is restricted to 1990 to present the loads using fama french data are

Alpha -0.03% Monthly.
MKT = 0.94
SMB = -0.16
HML = 0.01
UMD = 0.29

So it does look like the international fund gives more momentum exposure for whatever reason.

Going back to 1975 with US fund I get the following loads.

Alpha -0.22% Monthly.
MKT = 1.04
SMB = -0.21
HML = -0.01
UMD = 0.32

This larger negative alpha is unfortionate. Furthermore, it stands in contrasts to my memory of previous loadings Robert T posted (I can't find those) over long data series that shows MSCI US Momentum had lower negative alphas than other momentum funds.
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Wade Garrett »

pauliec84 wrote:
it is a bit of a dangerous game to buy etfs before they build up AUM. You are making a bet with little upside (satiated impatience) but lots of risks. I am just coming off of a similar mistake buying IEIS (ishares enhanced international small cap), at a considerable costs.
What are the risks? Just the possibility of the fund closing if it doesn't attract enough investors or some other things I'm not thinking of? iShares seems to do a nice job of keeping bid/ask spreads pretty tight on their new funds with low AUM.
"I'm not an inventor. I'm an improver. I see things that are wrong, and I improve them." - Larry David, Curb Your Enthusiasm
pauliec84
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

What are the risks? Just the possibility of the fund closing if it doesn't attract enough investors or some other things I'm not thinking of? iShares seems to do a nice job of keeping bid/ask spreads pretty tight on their new funds with low AUM.
1) Main risk is that fund closes and you take cap gains hit.
2) Fund cannot track underlying index well and you take cap gains hit.
3) Provider stops subsidizing liquidity and you have hard time getting out of position.
4) Without a lot of liquidity fund can take capital gains distribution.

If you are just a bit patient all those risks become non existent once AUM reaches reasonable level. I am anxious to get into this fund but waiting a few months is not going to have huge negative impact, expecially giving 0.8 correlation between US and developed UMD factor. FWIW my big rational to buy this versus US momentum is less about getting exposure to international UMD and more about getting exposure to UMD while avoiding exposure to US MKT factor given current valuations.
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

Alpha -0.22% Monthly.
MKT = 1.04
SMB = -0.21
HML = -0.01
UMD = 0.32
Just a quick correction. I was accidently dowloading "net indexes" rather than "gross index" returns. I think the gross index is the the proper data to use from MSCI website. This changes the alphas on the US Momentum index to the 0 that robert t was getting in previous analysis posted analysis (http://www.bogleheads.org/forum/viewtop ... a#p2127383).

Alpha = -0.02
Mkt-RF = 1.05
SMB = -0.20
HML = -0.00
umd = 0.32

Unfortunately, the alpha on the international series is in fact negative at ~2.5% over its life. None the less the the index had >1 % higher returns with similar risk as the mkt factor so the factor loadings were able to overcome this drag.
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Robert T
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Robert T »

.
In considering adding Intl. Momentum, my screening criteria, as it is for other funds is – will it allow me to achieve my factor load targets at lower cost? My answer is currently no, so I don’t intend to add it. My interest in adding direct exposure to momentum is to offset the often negative momentum loads on value series, and to reduce tracking error of a value tilted portfolio (i.e. to have a net zero exposure to momentum). Adding international momentum would significantly reduce the value load in international as current international value tilted fund options tend to have lower value loads than US options e.g. RAFI Fundamental Small Value vs. FTSE RAFI Developed ex- US Mid/small. Overall costs of implementation of MSCI Momentum World ex-US (tracked by IMTM) are likely higher than MSCI Momentum US (tracked by MTUM) given it has a larger number of stocks turned over annually, and that trade costs in international are higher.

Other observations on factor analysis: My sense is that the larger negative momentum on the MSCI, FF, and AQR International Momentum series is due to the small cap momentum premium being greater than in large caps over this time period and/or short-side moment being larger than long side momentum (at least more so than has historically been the case in US markets). For example, if only the international large cap premium is used in the analysis, the negative alpha – almost completely disappears (see comparison in results below). The international large cap momentum premium derived from the FF data was about 60% (average, 55% annualized) of the overall premium. i.e. over this period the MSCI World-ex US momentum series in effect captured 43% (the estimate momentum load) of 60% of the full premium (reflected in the negative alpha)– or about 25 percent of the full premium. In addition, the annual correlation (1996-2014) was smaller between US Mom and US SV (0.39) and US Mom and Intl SV (0.50), than between Intl Mom and Intl SV (0.70), and similar between US Mom and Intl SV (0.50), and Intl Mom and US SV (0.44).

Possible explanations: Perhaps Japan (where momentum has been absent) was the driver of a smaller momentum premium in large caps (World-ex US large cap momentum) than in small caps? Perhaps there is also greater diversification benefit of matching country specific value tilt, with the same country specific momentum tilt (e.g. US momentum with US Value [re: 0.39 correlation coefficient), UK momentum vs. Uk value etc). When these are combined in an international index with different country weights between value and momentum then some of this direct diversification benefit is perhaps lost (re: the 0.70 correlation coefficient between Intl country composite of momentum and value).

MSCI = MSCI World-ex US Momentum Index (from MSCI website)
Fama-French = Fama-French Global ex-US Large Cap Momentum (from Ken French Website)
AQR = AQR International Momentum Index (from AQR website)

June 1995-December 2014 longest period of data available for MSCI World-ex US Momentum

...............................MSCI.....Fama-French.......AQR
# stocks.....................265...........477...............462*

Annualized returns*..........7.2...........8.3..............6.7
SD*.............................23.1..........22.5............22.0

With FF Global-ex US Momentum factor (calculated from the 2x3 file on Ken French's website)

Alpha......................-0.20........-0.20...........-0.26
Mkt..........................1.01..........1.05.............1.01
Size.........................-0.07.........-0.04............-0.15
Value.......................-0.05.........-0.08.............0.02
Momentum.................0.45..........0.51.............0.42
R^2..........................0.98..........0.91.............0.95

With FF Global-ex US Momentum factor - large caps only (calculated from 2x3 file on Ken French's website)

Alpha......................-0.05........-0.02...........-0.12
Mkt..........................1.01..........1.04.............1.01
Size.........................-0.09.........-0.06............-0.17
Value.......................-0.02.........-0.06.............0.04
Momentum.................0.43..........0.47.............0.38
R^2..........................0.92..........0.99.............0.96

* for calendar year 1996-2014

Annual correlation coefficients: 1996-2014

US Mom-US SV = 0.39
Intl Mom-Intl SV = 0.70
Intl Mom-US SV = 0.44
US Mom-Intl SV = 0.50

US Mom = MSCI US Momentum
US SV = RAFI Fundamental Small Value
Intl Mom = MSCI World-ex US Momentum
Intl SV = FTSE RAFI Developed-ex US Small/Mid

Out of curiosity I also looked at the effect of adding Intl Momentum in place of International large cap value in a simulate global small cap and value tilted portfolio, 75:25 stock:bond. 1996-2014. Over this period, interational value (FTSE RAFI Developed-ex US) had slightly higher returns: return/SD = 7.5/22.5 vs. MSCI World-ex US Momentum = 7.2/23.1

1996-2014 - Annualized return/SD/2008 return

Portfolio with MSCI World-ex US Momentum in place on International large value = 10.8/14.6/-28.1
Portfolio without MSCI World-ex US Momentum = 10.8/14.9/-27.8

Marginal at best: Including Intl momentum resulted in no change in annualized return, marginal declined in SD, but with slightly higher downside in 2008

Obviously no guarantees.

Robert
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pauliec84
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

PS. The alphas on the US momentum from 1975-2014 = -0.02 (t-stat=-0.31).
That corresponds to what I am getting, nice to have confirmation that I have finally navigated the MSCI website correctly.
June 1995-December 2014 longest period of data available for MSCI World-ex US Momentum
I was incorrectly using the EAFE Momentum Data which goes back into the 70s (although factor data is only available from ~1990). Results were coincidentally similar probably reflecting similarity in construction. Thanks for bringing my attention to this.

As to the conclusions of your analysis, I generally agree with you. The only slight area of disagreement is that I think it is reasonable to take a small intl momentum position as a hedge against the relationships that have held in the past 20 years not continuing in the future. There is no doubt that over past 20 years it is quite clear per your analysis that US momentum was a better diversifier than int Momentum for a SCV tilted portfolio.

I just checked out correlations using MSCI index data over earlier periods. Unfortunately MSCI small value only goes back to 1994, so the analysis has the shortcoming of using EAFE Value and USA Value index which is mid and large and goes back to 1975. Nonetheless the data (shown below) shows that intl Momentum has the potential to a better diversifier than is represented by the 1996-2014 period. When combined with your very good points of potential higher costs in IMTM and the weaker SCV funds available to retail investors in the international market, my take away is to get a disproportionate amount of momentum exposure from US market, but still a little momentum exposure internationally.
My interest in adding direct exposure to momentum is to offset the often negative momentum loads on value series, and to reduce tracking error of a value tilted portfolio (i.e. to have a net zero exposure to momentum).
Following this strategy which I think is very reasonable would mean something along the lines of the following with an RAFI SCV / Momentum Strategy:
On US Side 64% SCV / 36% MTM (given -0.18 momentum load on PXSV). Approximate Total load of portfolio would be (1.04 MKT, 0.48 SMB, 0.47 HML, -0.01 UMD).
On Inst Side 80% SCV / 20% MTM (given -0.08 momentum load on PDN. Approximate Total load of portfolio would be (1.04 MKT, 0.44 SMB, 0.34 HML, 0.01 UMD). If you adjust the int umd load to be 0.25 based on your analysis you'd have to hold a bit more.

The other practical issue that I am grappling with is how to implement momentum exposure given real world trading frictions I face (can only really change position via new purchases). As I am currently underweight international, and underweight momentum exposure, international momentum has the appeal of killing two birds with one stone. That is just specific to myself.

Here is the 1975 to present correlation data:

Code: Select all

1975-2014	USAMOM	EAFE MOM	USA Val	EAFE Val
USA_Mom	1.00	0.54	0.82	0.54
EAFA MOM	0.54	1.00	0.48	0.84
USA Val	0.82	0.48	1.00	0.63
EAFE Val	0.54	0.84	0.63	1.00
				
1996-2014	USA_Mom	EAFA MOM	USA Val	EAFE Val
USA_Mom	1.00	0.79	0.77	0.74
EAFA MOM	0.79	1.00	0.61	0.81
USA Val	0.77	0.61	1.00	0.82
EAFE Val	0.74	0.81	0.82	1.00
				
1975-1995	USA_Mom	EAFE MOM	USA Val	EAFE Val
USA_Mom	1.00	0.32	0.87	0.35
EAFE MOM	0.32	1.00	0.35	0.86
USA Val	0.87	0.35	1.00	0.42
EAFE Val	0.35	0.86	0.42	1.00
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Robert T
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Robert T »

pauliec84 wrote:Following this strategy which I think is very reasonable would mean something along the lines of the following with an RAFI SCV / Momentum Strategy:
On US Side 64% SCV / 36% MTM (given -0.18 momentum load on PXSV). Approximate Total load of portfolio would be (1.04 MKT, 0.48 SMB, 0.47 HML, -0.01 UMD).
On Inst Side 80% SCV / 20% MTM (given -0.08 momentum load on PDN. Approximate Total load of portfolio would be (1.04 MKT, 0.44 SMB, 0.34 HML, 0.01 UMD). If you adjust the int umd load to be 0.25 based on your analysis you'd have to hold a bit more.
IMO the overall objective is to try to get as close to zero (non-negative) portfolio alpha as possible. In this way you have a higher likelihood of actually capturing the premiums you are targeting (whatever they may be), rather than this being eroded by large negative alphas. This is where I have some concern over Intl momentum. For example - if you were using a fund tracking MSCI World-ex US Momentum hoping for 0.45% of the momentum premium, this would have been severely eroded by the 2% negative annual alpha - resulting in not capturing the actual premiums indicated by the factor loads. Then you have to do a lot of gymnastics to make it fit i.e. reducing the expected premium by 40%, or assuming a 0.25% load rather than 0.45% to get rid of the negative alpha effect - IMO not such a 'clean/simple' approach. Not saying it can't be done, but my preference is avoid/reduce this sort of gymnastics (as I think it risks eroding some of the discipline). In this respect, the estimated alpha on Non-US developed side of my portfolio = 0.02 (without having to adjust for negative alpha). So perhaps a slight rewording of above - as many value funds typically have negative momentum these can show up as negative alpha in a FF 3 factor analysis. If this is the case, then the estimated factor loads don't translate fully into the corresponding share of realized factor premiums, as these are eroded by negative alpha (sometimes significantly so). This can lead to a difference in returns between two portfolios with the same factor loads, but one with a negative alpha, and one with zero alpha. Adding a direct momentum load can serve to reduce this negative alpha effect by off-setting the negative momentum loads on value funds (traditional indexes often have negative alphas as a result of negative momentum - some of which I still have). Adding an allocation to MSCI US momentum essentially reduces the momentum load on US allocation to zero (and while alpha is positive its close to zero). The other benefit of a momentum allocation is to reduce tracking error relative to the market/S&P500 (as per 1985-1999)- to help stay the course.

Many roads can get you there. Choose one, then try to stick to it (I think a disciplined framework helps - at least what I try to do). Patience is a key aspect. Easier said than done.

Robert
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Oliver
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Oliver »

How does IEIS stack up? iShares Enhanced International Small-Cap ETF attempts to capture quality, value, and size factors.

PS Only 11 months of data.
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Oliver »

Have you looked at AQR International Core Equity Fund Class L (QICLX)? Depending on how effectively it captures the factors, it may be the best choice despite an er of .70%.
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

How does IEIS stack up? iShares Enhanced International Small-Cap ETF attempts to capture quality, value, and size factors.
Just accidently closed out a 10 minute response to this one. Here is the short version.

I briefly owned IEIS but sold it the bitter task of acknowledging I had made a mistake and switched to PDN

Why I intentionally bough it
1) It is the most small/value tilted fund available to retail investors based on current characteristics.
2) I had mistakenly thought PDN had a factor load of 0.35 SMB / 0.25 HML based on its live history.

Why I opted for pdn moving forward:
1) We have no clue what IEIS is going to look like going forward (i.e. style drift).
2) I have since found out PDN's benchmark index has a ~0.55 SMB / 0.45 HML going back to 1990 which is plenty of small / value tilt for me. It also has nice non-negative alphas.
3) It has really low and not growing AUM (<10m)

If there was more information about what methdology ieis is executing i think it could be a nice fund. However we jsut don't know and probably never will know what to expect out of an active fund.
The closest I got was the below from the prospectus.
STRATEGY AND INVESTMENT PROCESS
IEIS employs a research-based investment process to combine
quality,
value, and size factors:

Quality: Companies with consistent and stable earnings

Value: Companies with lower relative valuations

Size: Companies with lower relative market capitalization
The investment process overweights factors with higher average
returns,
accounts for correlation between factors, and seeks to
minimize
portfolio risk.

Initial screens are for quality companies, favoring firms with
healthy
balance sheets and eliminating those with poor
fundamentals

Additional screens identify smaller-sized, undervalued
companies

Factor screens and allocations are under regular review by an
internal
investment Committee
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Ketawa »

Oliver wrote:How does IEIS stack up? iShares Enhanced International Small-Cap ETF attempts to capture quality, value, and size factors.
Oliver wrote:Have you looked at AQR International Core Equity Fund Class L (QICLX)? Depending on how effectively it captures the factors, it may be the best choice despite an er of .70%.
I have never seriously considered IEIS since I think 347 holdings is far too few in the developed small cap space. Not to mention the liquidity in the ETF and low AUM. In comparison, PDN has 1491 holdings. I believe PDN doesn't explicitly target quality, but RAFI Fundamental Pure Small Value has had exposure to it in the past, so I think there's a pretty good chance that PDN will as well. QSMLX targets the same factors plus momentum and has 655 holdings. It's a domestic fund, but you're still getting broader diversification with an additional factor.

According to the process posted by pauliec84, the primary screen for IEIS is quality. Quality is the weakest of the factors and has the weakest risk story, maybe even nonexistent. I think value, size, and momentum should be the focus.

I do hold QICLX and it has 322 holdings. It's a large cap fund and adds momentum, so the fact it has almost as many holdings as IEIS tells me that IEIS probably has too much diversifiable risk.
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by in_reality »

pauliec84 wrote:
Just accidently closed out a 10 minute response to this one. Here is the short version.
Ouch, anyway thanks for your informative posts.
pauliec84 wrote:Why I opted for pdn moving forward:

3) It has really low and not growing AUM (<10m)
It's $107.8MM, isn't it?

Anyway, PDN seems quite similar to FNDC and SFILX. PXSV is not like FNDA and SFSNX though as it holds much fewer mid caps. So PDN doesn't seem exactly like the international equivalent of PXSV (probably due to it's "pure value" methodology from the prior index before switching to RAFI but continuing this value screen).
pauliec84 wrote:Following this strategy which I think is very reasonable would mean something along the lines of the following with an RAFI SCV / Momentum Strategy:
On US Side 64% SCV / 36% MTM (given -0.18 momentum load on PXSV). Approximate Total load of portfolio would be (1.04 MKT, 0.48 SMB, 0.47 HML, -0.01 UMD).
On Inst Side 80% SCV / 20% MTM (given -0.08 momentum load on PDN. Approximate Total load of portfolio would be (1.04 MKT, 0.44 SMB, 0.34 HML, 0.01 UMD). If you adjust the int umd load to be 0.25 based on your analysis you'd have to hold a bit more.
I am having a tough time following this exactly. I see PDN and SFILX having negative momentum until 2012 and then that switching to around zero (PDN) or positive SFILX.

So backtesting, no adding momentum to these doesn't help. Actually, the loading seems to invert with the funds having a higher momentum load in the rolling regressions than value.

For large caps though such as SFNNX or PXF (RAFI large cap international), the 36 month rolling regression shows a continued value load and the momentum load never exceeds it. Backtesting shows adding momentum works.

I mean so given the fluctuating factor exposures, I am not sure exactly what to target and just picked 20% for momentum as I hold both large and small caps for international.

https://www.portfoliovisualizer.com/fac ... ctor=false
Robert T wrote:IMO the overall objective is to try to get as close to zero (non-negative) portfolio alpha as possible....Adding a direct momentum load can serve to reduce this negative alpha effect by off-setting the negative momentum loads on value funds (traditional indexes often have negative alphas as a result of negative momentum - some of which I still have).
Makes sense to me. Still, the RAFI funds have time varying factor exposure I think. Maybe PXSV is slightly different due to the "pure value" screen.
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Robert T »

.
Few thoughts
  • First – determine how much you need in retirement

    Second – structure an investment and savings plan to get there – based on willing, ability, need to take risk. This includes how much to save, and identifying which risks/factors an investor wants exposure to. For some its just beta is stocks, and little term or default/credit risk in bonds, for others its beta, size, and value, for others it may be quality or momentum. Choose your risk/factor exposure.

    Third – select instruments/funds to achieve your targeted risk/factor exposure

    Four – have disciplined implementation
I think there is a risk that the myriad of ‘new factors’ and new funds trying to track them induces activity to add new factors, and deviations from well thought out long-term plans – all in a quest to achieve higher returns.

IMO its very important to have criteria to screen new options – e.g. can you achieve the second point above at lower cost. In the absence of this it becomes a very slippery slope with a low bar for anything to make it into a portfolio – with the risk of inducing frequent changes, and constant tinkering.

With this caveat – here are the factor loads for the simulated AQR international core (value/momentum/quality) – from the article A New Core Paradigm.

1990-2012

Alpha = 0.15 (1.51) [monthly] t-stat in parenthesis
Mkt = 0.87
Size = -0.11
Value = 0.45
Momentum = 020
R^2 = 0.89

If these are the factors you would like to target – then it may be a good option for tax-advantaged accounts. But I would only suggest switching if this matches with the second point above, ditto IEIS – although we have no idea about the factor loads – so it’s a leap of faith on what they might be ….

For me, my target is a 0.2/0.4 size and value load – lets take International as an example. MSCI EAFE Value has a historical value load of 0.35 fairly similar to FTSE RAFI Developed ex-US 1000 since 1990 – however the alpha on MSCI EAFE Value was -0.09, while on FTSE RAFI Developed ex-US 1000 is was +0.02. Put another way, the returns on MSCI EAFE Value were about 1 percent less (-0.09*12) than the returns suggested by the factor loads. If you were targeting a specific factor load and associated expected return, the share of the premiums captured, as implied by the factor loads, would have been eroded by 1% from the negative alpha. In contrast, the alpha’s on the RAFI series was essentially zero. Combining FTSE RAFI Developed ex-US 1000 FTSE RAFI Developed ex-US Mid/Small in a 60:40 combination gave factor load of close to 0.2/0.4 for size/value with zero alpha – in line with the objectives of the second point above - and a more accurate way of targeting intl. factor exposure IMO (from this analysis). The Powershares RAFI funds have lagged their benchmark by about 0.3% more than iShares EAFE Value over last 5 years (some explained by 0.1% higher expense ratio), but they also seems to be doing better more recently on tracking error and still lower than the 1% negative alpha on MSCI EAFE Value.

No need to try to add more/do much else.

July 1990-November 2014

P1 = MSCI EAFE Value
P2 = FTSE RAFI Developed ex-US 1000
P3 = FTSE RAFI Developed ex-US Mid/Small
P4 = 60:40 FTSE RAFI Developed ex-US 1000:Ftse RAFI Developed ex-US Mid/Small

..................................P1.............P2………......P3……………P4

Alpha......................-0.09.........0.03.............0.02.......0.02
Mkt..........................1.00..........1.01.............0.99.......1.00
Size.........................-0.16.........-0.07............0.57........0.19
Value........................0.35.........0.38.............0.42........0.40
R^2..........................0.97..........0.97.............0.95.......0.97

Annualized returns*.........6.0.........7.8.............8.0...........7.9
Annualized Sd................17.7........17.7...........17.0.........17.2

Using FF Global-ex US factors from Ken French’s website

Just an example. If you don’t have an approach of disciplined implementation of a plan (point 4 above), then why have a plan in the first place. Important to have fund/new series screening criteria IMO.

Just my take. Obviously no guarantees.

Robert
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Sammy_M
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Sammy_M »

Robert,

Do you see merit in isolating the other factor exposure from beta exposure for rebalancing benefit?

I'm intrigued by the QSPIX strategy and am seriously considering lessening my use long-only Value & Momentum funds and redirecting these monies to inexpensive Market funds and QSPIX (at 5-10% of equities). This seemingly would render a very small change in overall portfolio E/R and theoretically offer enhanced diversification. For me, it would look something like this...

US: 18 TSM ■ 4 IJS, 3 BRSIX
Dv: 10 VEA ■ 9 SFILX
Em: 4 VWO ■ 3 DGS
Bnd: 17 ST, 8 IT ■ 5 I-Bonds/TIPS
Alt: 10 RE ■ 7 QSPIX ■ 3 PCRIX/RING
Last edited by Sammy_M on Sun Feb 01, 2015 1:06 pm, edited 2 times in total.
pauliec84
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

$107.8MM, isn't it?
According to ishares website IEIS AUM is $8,729,854 as of 1/30/2015. Not sure what you are thinking of with the 107m.
I am having a tough time following this exactly. I see PDN and SFILX having negative momentum until 2012 and then that switching to around zero (PDN) or positive SFILX.
Momentum loads (all loads for that matter) fluctuate a lot over time. Best thing to do is use entire historic period of underlying index. Going back to 1996, it has a momentum load of -0.13.

I was able to find a bit more about IEIS.

Rick Ferri said linked its methodology to the following paper:
These funds will follow a strategy outlined in a recently released paper titled Global Return Premiums on Earnings Quality, Value, and Size by Max Kozlov of BlackRock and Antti Petajisto of New York University (NYU); Yale School of Management; BlackRock (http://papers.ssrn.com/sol3/papers.cfm? ... id=2179247).
This makes the enhanced strategy a little less of a jump into the deep end. It is using a factor based methodology and not stock selection based). Furthermore I think the enhanced small funds are additionally attractive after the Asness blog post "The Small-Firm Effect Is Real, and It’s Spectacular" which shows that small quality greatly outperforms small junk. With that said we still have 0 idea if they will be able to implement this effectively and these same AUM concerns.


Furthermore, MSCI has multi-factor "US Quality Mix" Index which say tragets (MSCI QualityMix): Minimum Volatility, Value,and Quality," with data going back to 1988. Obviously very different methodology than the ishares enhanced funds will follow, but is the best we got.

1988-2014, Using AQR factor data so that we get quality measure.
Alpha 0.00
MKT 0.98
SMB -0.15
HML 0.11
UMD -0.07
QMJ 0.30

So it does seem possible to get exposure to HML and QMJ without negative alpha. Granted IEIS is international space and small space so things may be different.
The above Petajisto has factor loads for the Quality portfolio, but not for the quality - value mix portfolio.

The petajisto paper claims that quality and value are negative correlated which partially is what makes the combination strategy attractive (reminds me of value & momentum). However looking though old Asness blog post it seems like the relationship depends on the definition of quality and of momentum. Fama French HML and RMW (profitability) or positively correlated. HML and UMD have a -0.11 correlation since 1957, HML and QMJ have a -0.06 correlation in same time frame.


And to pre discipline concerns:
First – determine how much you need in retirement

Second – structure an investment and savings plan to get there – based on willing, ability, need to take risk. This includes how much to save, and identifying which risks/factors an investor wants exposure to. For some its just beta is stocks, and little term or default/credit risk in bonds, for others its beta, size, and value, for others it may be quality or momentum. Choose your risk/factor exposure.

Third – select instruments/funds to achieve your targeted risk/factor exposure

Four – have disciplined implementation

I think there is a risk that the myriad of ‘new factors’ and new funds trying to track them induces activity to add new factors, and deviations from well thought out long-term plans – all in a quest to achieve higher returns.

If you don’t have an approach of disciplined implementation of a plan (point 4 above), then why have a plan in the first place. Important to have fund/new series screening criteria IMO.
I generally agree with you. Without a disciplined approach, you will get lost in the plethora of new products, and subject yourself to the dumb money risk of skating where the puck was (For me at least the draw of IEIS was the value (it has lowest BM among small intl funds), but I came to your needing to take a leap of faith view (as I state above)). Furthermore, assuming we are not taking long-short portfolios, there is a constraint on the total factor exposure we can get in a fund as buying a "quality" or "momentum" fund generally means making some sacrifice to ones value exposure.

One little point of differenece is that I think lose some explanatory power by not giving more consideration to momentum. For example consider your analysis of EFV and what happens if we consider momentum (the data is has 3 less months as the Ken French data is missing those months).

Code: Select all

3- Factor
Alpha = -0.59% Annual
Mkt-RF =1.01
SMB = -0.17
HML = 0.34

4-Factoor
Alpha = +0.56 Annual
Mkt-RF = 0.99
SMB = -0.16
HML=	0.30
UMD =-0.10
The same result, that the momentum exposure explains the 3-factor alpha holds using the AQR data which goes back through 1990. I think this knowledge is helpful. On the other hand the RAFI indexes which have a positive alpha despite big negative momentum exposures.
pauliec84
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

Ketawa wrote: Quality is the weakest of the factors and has the weakest risk story, maybe even nonexistent. I think value, size, and momentum should be the focus.
I just checked the data and do not agree with this statement. Below please see Return & Standard Devation Numbers for the factors from July 1957 till present.

Code: Select all

	MKT	SMB	HML	UMD	QMJ
Monthly Ret	0.51%	0.18%	0.31%	0.72%	0.33%
Monthly SD	4.40%	2.70%	2.58%	3.97%	2.30%
Monthly SR	11.71%	6.69%	12.09%	18.24%	14.57%
Annualized SD	15.24%	9.35%	8.94%	13.74%	7.95%
QMJ looks just as robust as the other factors over this time frame.
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by in_reality »

pauliec84 wrote: According to ishares website IEIS AUM is $8,729,854 as of 1/30/2015. Not sure what you are thinking of with the 107m.
Yeah sorry, duh, I quoted PDN.


pauliec84 wrote:
I wrote:I am having a tough time following this exactly. I see PDN and SFILX having negative momentum until 2012 and then that switching to around zero (PDN) or positive SFILX.
Momentum loads (all loads for that matter) fluctuate a lot over time. Best thing to do is use entire historic period of underlying index. Going back to 1996, it has a momentum load of -0.13.

OK I will do that then.

How though do you get the factors for the index? Are you calculating these? If so, how (may I ask please)?

I'm using Russell Fundamental Index series, and the iShares momentum funds (MTUM, IMTM) and PowerShares PIE (emerging momentum).
pauliec84
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

How though do you get the factors for the index? Are you calculating these? If so, how (may I ask please)?
CRSP and MSCI put there indexes online available to public. You can download fama french and aqr factors from websites and figure out the loads. A lot of RAFI indexes are online, I have not been able to find PDN's. Robert T was nice enough to provide the loads for me for PDN.
I'm using Russell Fundamental Index series, and the iShares momentum funds (MTUM, IMTM) and PowerShares PIE (emerging momentum).
I think if you are using those you are doing alright. My current investment target is basically ~70% RAFII fundamental index (which is very similar to russell's) and a bit of the ishares momentum. Not sure if that is the best approach (the ~0.40 ER for combined strategy is steep) but if it does not work out misery does love company :).
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by Ketawa »

pauliec84 wrote:
Ketawa wrote: Quality is the weakest of the factors and has the weakest risk story, maybe even nonexistent. I think value, size, and momentum should be the focus.
I just checked the data and do not agree with this statement. Below please see Return & Standard Devation Numbers for the factors from July 1957 till present.

Code: Select all

	MKT	SMB	HML	UMD	QMJ
Monthly Ret	0.51%	0.18%	0.31%	0.72%	0.33%
Monthly SD	4.40%	2.70%	2.58%	3.97%	2.30%
Monthly SR	11.71%	6.69%	12.09%	18.24%	14.57%
Annualized SD	15.24%	9.35%	8.94%	13.74%	7.95%
QMJ looks just as robust as the other factors over this time frame.
You're right, I knew that QMJ/PMU were about 4% annually. More than small, about the same as value, and less than market and momentum. I don't know why I said it was the smallest. I still don't think there's a good risk story. IIRC the AQR core equity funds put about 40% importance on value, 40% momentum, and 20% profitability in their sorts. That sounds about right to me.
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Re: iShares Files for Intl Quality and Momentum Factor ETFs

Post by pauliec84 »

You're right, I knew that QMJ/PMU were about 4% annually. More than small, about the same as value, and less than market and momentum. I don't know why I said it was the smallest. I still don't think there's a good risk story. IIRC the AQR core equity funds put about 40% importance on value, 40% momentum, and 20% profitability in their sorts. That sounds about right to me.
While quality has been strong, I think the concern with it (as to a lesser extent with momentum) is that there is absolutely no risk story involved. To conjecture, maybe there is less growth and that is why it is undervalued. But as far as it persisting in the future I think that is the hold up.

I trust C. Asness so 40 40 20 sounds like a reasonable allocation to those factors. With that said, I still go back to Robert T's response which is that in the factor zoo you only have soo much time to visit the exhibits. You should pick your targets and stick to them. I don't have access to the AQR products and if I did I may sing a different toon (although they have a pretty steep expense). Per Robert T's backtesting thorough mid 70s, trageting mostly value than some small cap produces returns and risks that will achieve the investment goals of most of us.
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