iShares Enters Factor Investing Market in a Big Way

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

iShares Enters Factor Investing Market in a Big Way

Post by Rick Ferri » Thu Apr 18, 2013 9:31 am

Factor strategies [link removed by admin LadyGeek] seek to provide competitive risk-adjusted returns versus the corresponding broad market and Blackrock's iShares wants in. DFA has been doing it since the mid-1990s. Reseach Affiliates (RA) come into the market about 5 years ago with RAFI methodology. Morningstar come in a few years ago with their Market Factor Tilt Indexes.

iShares is calling their methdology "The Next Level of Investing." The factors are quality, value, size, momentum, and volatility. Today the firm is launching three very low cost (0.15%) single factor based ETFs - three of the funds are being seeded with $100 million each by a pension fund, the Arizona State Retirement System, while the other two are the firm’s first real foray into active management, according to IndexUniverse.com.

iShares is lauching two “enhanced” actively managed ETFs built scoring stocks based on quality, value and size (ER 0.35%) 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.

More choice are a good thing!

Rick Ferri
Last edited by Rick Ferri on Thu Apr 18, 2013 10:25 am, edited 3 times in total.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

hlfo718
Posts: 771
Joined: Wed Dec 01, 2010 9:17 am
Location: NYC

Re: iShares Enters Factor Investing Market in Big Way

Post by hlfo718 » Thu Apr 18, 2013 9:38 am

Thanks for the info Rick. Will these be similar to the DFA funds? Northern Trust came out with their Flexshares last year with ER of 0.28%. Wonder how similar iShares will be to the Flexshares.

OverTheHill
Posts: 308
Joined: Wed Mar 27, 2013 4:58 pm
Location: North Carolina

Re: iShares Enters Factor Investing Market in Big Way

Post by OverTheHill » Thu Apr 18, 2013 9:48 am

Sounds a lot like stock picking by active fund managers, only with a new marketing angle. Also sounds like a marketing ploy to raise expense/fees above that of normal index funds, again by selling folks on the idea that stocking picking is better than indexing. I'll pass.

User avatar
Random Musings
Posts: 5209
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Re: iShares Enters Factor Investing Market in Big Way

Post by Random Musings » Thu Apr 18, 2013 9:50 am

Currently the two ETF's in the link (large cap and small cap enhanced) have ER's of 0.17% and 0.35% (or so). Also, and I'm not quite sure if this is somewhat of a concern, the number of holdings is around 110 for the large-cap and 260 or so for the small cap. But they are labeled "active". I believe DFA holds quite a bit more holdings, which implies to me better diversification.

With respect to the seeded funds, I wonder if they will be more diversified.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in Big Way

Post by Rick Ferri » Thu Apr 18, 2013 9:51 am

The value strategy uses a fundamental weighting methodology to achieve the value tilt.

From the iShares MSCI USA Value Factor ETF prospectus:

The MSCI USA Value Weighted Index (the “Underlying Index”) is based on a traditional market capitalization-weighted parent index, the MSCI USA Index, which includes U.S. large- and mid- capitalization stocks. The Underlying Index reweights each security of the parent index to emphasize stocks with higher accounting values compared to the accounting values of the constituents in the parent index. The value weighting of each security is determined using four accounting variables based on publicly reported financial data: book value and three-year moving averages of sales, earnings, and cash earnings. Components primarily include consumer discretionary, financial, healthcare and information technology companies. As of February 28, 2013, there were 604 issues in the Underlying Index.

+++++++++++

The size factor strategy is a combination of firm size and variance (lower volatility):

From the iShares MSCI USA Size Factor ETF prospectus:

The MSCI USA Risk Weighted Index (the “Underlying Index”) is based on a traditional market capitalization-weighted parent index, the MSCI USA Index, which includes U.S. large- and mid- capitalization stocks. The Underlying Index considers the “size” (market capitalization) of individual stocks in the parent index and generally is expected to have a smaller average market capitalization than the parent index. The Underlying Index reweights each security of the parent index using a rules-based methodology so that stocks with relatively smaller average market capitalization and lower risk weightings based on the index provider’s methodology constitute a higher percentage of the index. The risk weighting of each security is calculated using the inverse of its historical variance, estimated based on three years of weekly return data. The Underlying Index seeks to provide negative exposure to two systematic factors, the size factor and volatility factor, by emphasizing stocks with smaller average market capitalization and lower realized volatility than its parent index. As of February 28, 2013, there were 604 issues in the Underlying Index.

I see a couple of interesting points about this fund, 1) it does not include small cap even though it is a "size factor" fund; 2) the low volatility weighting would create a value tilt in the index.

+++++++++++++++

Size and value factor funds using weighting to change the dynamics of the 604 stocks the MSCI USA Index, which includes U.S. large- and mid- capitalization stocks, while the Momentum factor does not. It selects stocks based on price momentum over the previous 6-12 months. As of February 28, 2013, there were 125 securities in the Underlying Index.

From the iShares MSCI USA Momentum Factor ETF prospectus:

The MSCI USA Momentum Index (the “Underlying Index”) consists of stocks exhibiting relatively higher momentum characteristics than the traditional market capitalization-weighted parent index, the MSCI USA Index, which includes U.S. large- and mid- capitalization stocks. Momentum is defined as a security's standard deviation of daily returns over the past year (expressed as a positive number, with securities that have the highest positive standard deviations receiving the highest scores). The main variable used to construct the Underlying Index is each security’s price momentum over the previous 6-12 months. Daily local returns are used to compute the price momentum. The results are then standardized at +/-3 standard deviations and the standardized z-scores are translated into a momentum score. Securities with the highest momentum scores are selected for inclusion in the Underlying Index. As of February 28, 2013, there were 125 securities in the Underlying Index. The weight of each index constituent is determined by multiplying the security’s momentum score by its free-float market capitalization. Components primarily include consumer discretionary, consumer staples and healthcare companies.

Rick Ferri
Last edited by Rick Ferri on Thu Apr 18, 2013 10:19 am, edited 5 times in total.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

User avatar
Random Musings
Posts: 5209
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Re: iShares Enters Factor Investing Market in Big Way

Post by Random Musings » Thu Apr 18, 2013 10:08 am

Rick,

If I would have scrolled down further, i would have seen the other funds.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

EDN
Posts: 528
Joined: Sat Dec 29, 2012 7:55 pm
Location: Oklahoma City, OK

Re: iShares Enters Factor Investing Market in Big Way

Post by EDN » Thu Apr 18, 2013 10:13 am

More products from the Wall Street marketeers. Some basis in legitimate asset pricing research, some attempt to exploint recent patterns and profit from the fees for doing so. Some of these will survive, others won't. I'd be very hesitant to use ETFs outside of conventional market cap weighted strategies, their reconstitution approach could create issues here. And, of course, Vanguard funds already cover the spaces these products are entering that are worth consideration, so Im not sure this means much. Index Universe has something more to fill my spam box with, serious investors won't be interested.

One thing is certain, the ETF industry has taken marketing and "throw stuff against the wall and see what sticks" to a level traditional active management only dreamed of. I have a hard time trusting any of them not designed in Valley Forge.

Eric

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in Big Way

Post by Rick Ferri » Thu Apr 18, 2013 10:22 am

Let's not put a halo over anyone's head. There's been a fair amount of jelly throwing in Valley Forge.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

User avatar
baw703916
Posts: 6679
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: iShares Enters Factor Investing Market in a Big Way

Post by baw703916 » Thu Apr 18, 2013 11:12 am

There's already a whole bunch of reasonable SV funds out there, I'm not sure this is much to write home about.

Now if they come out with an international version of this approach, that might be interesting.

Brad
Most of my posts assume no behavioral errors.

Nate270
Posts: 88
Joined: Wed Apr 07, 2010 12:19 pm

Re: iShares Enters Factor Investing Market in a Big Way

Post by Nate270 » Thu Apr 18, 2013 11:19 am

I agree, more choices are a good thing. I have a belief though that as more products become available to capture certain factors/styles of the market that their previous premiums will diminish.

larryswedroe
Posts: 15691
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: iShares Enters Factor Investing Market in a Big Way

Post by larryswedroe » Thu Apr 18, 2013 11:26 am

Just one thought here
It's much better to have a core fund strategy that incorporates multifactors than to have separate funds for each factor
Larry

EDN
Posts: 528
Joined: Sat Dec 29, 2012 7:55 pm
Location: Oklahoma City, OK

Re: iShares Enters Factor Investing Market in a Big Way

Post by EDN » Thu Apr 18, 2013 11:27 am

Nate270 wrote:I agree, more choices are a good thing. I have a belief though that as more products become available to capture certain factors/styles of the market that their previous premiums will diminish.
In general, more choices are a good thing. But the evidence shows that investors are particularly susceptible to chasing past performance (simulated or otherwise) and the more narrowly focused and volatile a strategy is, the more likely it is that an investor will underperform the actual returns of the fund (see Bogle's comments/statistics on this).

There is an inherent "grass is always greener" mindset amongst some investors. As in, nothing is better than what has yet to come out. We like shiny, we like new, but usually all we get is a glistening piece of garbage.

I am particularly weary of a strategy developed for a pension fund. We know their results/investment decisions have been a disaster. And at amounts over $20M, almost no one would opt for a commingled fund over a separately managed account. So the red flags are flying on this one.

Eric

EDN
Posts: 528
Joined: Sat Dec 29, 2012 7:55 pm
Location: Oklahoma City, OK

Re: iShares Enters Factor Investing Market in a Big Way

Post by EDN » Thu Apr 18, 2013 11:28 am

larryswedroe wrote:Just one thought here
It's much better to have a core fund strategy that incorporates multifactors than to have separate funds for each factor
Larry
Larry,

I'm not sure it is in ETF form. Either you reconstitute just once per year and your exposure to the factors is completely watered down, or you do so on a monthly or quarterly basis and the blind reconstitution trading kills you in costs.

Eric

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in a Big Way

Post by Rick Ferri » Thu Apr 18, 2013 11:32 am

larryswedroe wrote:Just one thought here, it's much better to have a core fund strategy that incorporates multifactors than to have separate funds for each factor
Larry
I don't know if it's "much" better, but there are some benefits. Tax efficiency is not one of them though unless it's done in an ETF structure, and the all-in-one funds also have higher management fees than slice and dice.

EDN wrote:I'm not sure it is in ETF form. Either you reconstitute just once per year and your exposure to the factors is completely watered down, or you do so on a monthly or quarterly basis and the blind reconstitution trading kills you in costs.
ETFs have come a long way in the past few years. Holdings are expanding, index methodology is getting better, liquidity is better, and the way these funds create and redeem is quite robust today. For example, custom creation and redemption baskets are now common, which allows the fund manager increased flexibility to hold more securities and less liquid securities.

I'm not saying use only ETFs. I'm saying that the market is maturing and the old stale arguments against ETFs don't apply as much.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

garlandwhizzer
Posts: 1934
Joined: Fri Aug 06, 2010 3:42 pm

Re: iShares Enters Factor Investing Market in a Big Way

Post by garlandwhizzer » Thu Apr 18, 2013 11:54 am

Simple question: Will all the new products competing to exploit the FF size and value premiums overgraze the available S&V premiums and reduce returns to the just the equity premium? It seems to me that most equity investments now are done by institutions and professionals, all of whom are familiar with the FF model. Why won't the premium be arbitraged away if everyone knows about it and so many are trying to exploit it?

Garland Whizzer

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in a Big Way

Post by Rick Ferri » Thu Apr 18, 2013 12:27 pm

Only if a large number of people invest in them. :wink:

Most people came rushing into this strategy because they were trying to extrapolating past returns into the future. We see that even on Bogleheads with all the posts about how "hypothetical" returns using this strategy were so great over the decades. The problem is those returns are hypothetical. FF published their research in the mid-1990s and then the strategy underperformed for quite some time. It has only worked well in the last decade, exceedingly well I might add. That's not likely to continue.

We've also seen a huge back-door shift to dividend paying stocks and low-volatility strategies which are value plays. I don't think most investors in those strategies understand that its value investing. They're just chasing recent returns.

So, it's a good question. Will the mob ruin the strategy or run away from it like they did in the 1990s. Running from it would be good for value investors.

I do think that doing a tilt to small-value wouldn't harm your portfolio, but it's tough to guess the benefit as well.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

caklim00
Posts: 1722
Joined: Mon May 26, 2008 10:09 am

Re: iShares Enters Factor Investing Market in a Big Way

Post by caklim00 » Thu Apr 18, 2013 12:45 pm

Why oh Why can't anyone do an ExUS Small/Value tiled fund? I'm going to ignore all these other funds as just noise...

EDN
Posts: 528
Joined: Sat Dec 29, 2012 7:55 pm
Location: Oklahoma City, OK

Re: iShares Enters Factor Investing Market in a Big Way

Post by EDN » Thu Apr 18, 2013 12:46 pm

garlandwhizzer wrote:Simple question: Will all the new products competing to exploit the FF size and value premiums overgraze the available S&V premiums and reduce returns to the just the equity premium? It seems to me that most equity investments now are done by institutions and professionals, all of whom are familiar with the FF model. Why won't the premium be arbitraged away if everyone knows about it and so many are trying to exploit it?

Garland Whizzer
First, new products won't likely increase the amount of people tilting to small and value, it will just change how they are doing it, or it might not if no one embraces the new ways. Second, risk doesn't go away because more people embrace it, that only applies to anomalies. The odds of going down in a plane crash are not associated at all with how many people are on the plane. Has the potential equity premium gone down since institutions, and eventually Vanguard, started using/offering broad based stock indexes to target the equity premium?

What will happen (already happens) is the more $ is invested blindly and mechanically in small and value, the more opportunity there is for patient trading to sidestep bid/ask spreads in trading or provide liquidity at reconstitution time and earn a return for doing so.

Eric

vesalius
Posts: 794
Joined: Tue Jul 13, 2010 7:00 pm
Location: Texas

Re: iShares Enters Factor Investing Market in a Big Way

Post by vesalius » Thu Apr 18, 2013 12:49 pm

It appears the Arizona State Retirement System is seeding each of these three funds with $100 million.

iShares, Ariz. Pension Team Up For New ETFs

EDN
Posts: 528
Joined: Sat Dec 29, 2012 7:55 pm
Location: Oklahoma City, OK

Re: iShares Enters Factor Investing Market in a Big Way

Post by EDN » Thu Apr 18, 2013 12:58 pm

Rick Ferri wrote:
EDN wrote:I'm not sure it is in ETF form. Either you reconstitute just once per year and your exposure to the factors is completely watered down, or you do so on a monthly or quarterly basis and the blind reconstitution trading kills you in costs.
ETFs have come a long way in the past few years. Holdings are expanding, index methodology is getting better, liquidity is better, and the way these funds create and redeem is quite robust today. For example, custom creation and redemption baskets are now common, which allows the fund manager increased flexibility to hold more securities and less liquid securities.

I'm not saying use only ETFs. I'm saying that the market is maturing and the old stale arguments against ETFs don't apply as much.

Rick Ferri
At the end of the day, the market makers on the other side of these index changes are not the March of Dimes or the Red Cross. They are for profit traders who are in business to earn arbitrage trading profits at the expense of investment pools that focus on immediacy of execution and not price of execution.

I'm sure they are getting somewhat better, of course that's coming from a starting point of pure garbage in some cases (Russell). Vanguard is getting better, hence my comments above. iShares is getting better? At what, finding ways to pocket more securities lending revenue than they must pay out in legal fees to defend themselves? The others are getting better? Powershares, Wisdomtree, and those other gimmicky firms? I wouldn't know how to tell beyond all the new sector and currency strategies they are releasing on a daily basis.

At the end of the day, ETFs are evaluated on their ability to track the underlying index, not their ability to capture expected returns. If the later happens, great. But the former better not experience any short-fall (even if it is random and expected to be value added). The iShares Russell 2000 Value index has almost 3X the assets of the S&P 600 Value index, for example. Need I say more? For a big pension or other fund committee that monitors this stuff daily/weekly/monthly, that's how it must be on the "beta" side of things. For us individual investors who measure success in decades and not days, short-term deviations from some arbitrarily defined benchmark is just noise.

Eric

EDN
Posts: 528
Joined: Sat Dec 29, 2012 7:55 pm
Location: Oklahoma City, OK

Re: iShares Enters Factor Investing Market in a Big Way

Post by EDN » Thu Apr 18, 2013 1:41 pm

larryswedroe wrote:Just one thought here
It's much better to have a core fund strategy that incorporates multifactors than to have separate funds for each factor
Larry
The other thing is, and I speak from real world application and not theoretical academic performance perspectives -- there are significant behavioral reasons to unbundle factors. Lets say you know you'll be holding LV and SV for obvious reasons. But you don't want that much tracking error relative to the market. Should you buy an integrated core vehicle like AQR that sorts on combo of value, momentum, and quality? Or are you better off simply buying a LG fund that sorts on quality and sticks with the traditional high priced companies we know don't correlate very well with beaten down distressed firms? On the later approach, here are the five year annualized returns for the unbundled approach:

LG ("high profitability") = +30.8%
S&P 500 = +28.6%
TSM = +27.7%
LV = +23.6%
SV = +19.1%

If LG ("high profits") and S&P 500/TSM have similar expected returns, yet the LG helps a good deal more when value and small are out of favor, this may be a very useful portfolio addition to help ease the pain of the periods when HmL is hurting. Inside some bundled portfolio, this extreme divergence is lost to an extent.

The goal is not the highest raw returns, but acceptable returns one can live with.

Eric

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in a Big Way

Post by Rick Ferri » Thu Apr 18, 2013 1:47 pm

Eric

If you're going to make the argument that index funds and ETFs that track indexes are inferior to whatever you're selling, then you're going to have to quantify in real dollars. Provide some relevant analysis. Sure, the iShare S&P 600 value ETF (IJS) has only 446 holdings while other funds have more holdings, but how has this disadvantage IJS? Show some real data.

Rick Ferri
Last edited by Rick Ferri on Thu Apr 18, 2013 2:06 pm, edited 1 time in total.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

User avatar
White Coat Investor
Posts: 13370
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: iShares Enters Factor Investing Market in a Big Way

Post by White Coat Investor » Thu Apr 18, 2013 2:05 pm

I'd love to have access to a DFA-like fund without having to hire an advisor.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

User avatar
Ketawa
Posts: 1933
Joined: Mon Aug 22, 2011 1:11 am
Location: DC

Re: iShares Enters Factor Investing Market in a Big Way

Post by Ketawa » Thu Apr 18, 2013 2:11 pm

My understanding is that all three of the specific factor ETFs (VLUE, SIZE, and MTUM) start from the MSCI USA Index. It has 604 stocks, large- and mid-caps. Then, each of the factor ETFs reweights the 604 holdings according to whichever factor it is targeting.

VLUE and SIZE - all 604 securities, just in different weights than market capitalization
MTUM - only 125 of the securities

I don't think VLUE and SIZE would have any advantages over ETFs already on the market. Why jump through hoops with strange weighting strategies to get something as simple as a size or value tilt?

I don't think any other momentum ETFs are trading, so MTUM might warrant some consideration for investors who want exposure to momentum.

For the two "enhanced" ETFs that combine quality, value, and size, aren't these the only ETFs that target quality right now?

One concern with the small-cap fund (IESM) is that it only has 263 holdings, which might not be enough in the small-cap space. 110 holdings for IELG is probably enough.

I doubt I'm going to give up my plain vanilla VBR anytime soon.

EDN
Posts: 528
Joined: Sat Dec 29, 2012 7:55 pm
Location: Oklahoma City, OK

Re: iShares Enters Factor Investing Market in a Big Way

Post by EDN » Thu Apr 18, 2013 2:24 pm

Rick Ferri wrote:Eric

If you're going to make the argument that index funds and ETFs that track indexes are inferior to whatever you're selling, then you're going to have to quantify in real dollars. Provide some relevant analysis. Sure, the iShare S&P 600 value ETF (IJS) has only 446 holdings while other funds have more holdings, but how has this disadvantage IJS? Show some real data.

Rick Ferri
Rick,

First, you must have me confused with a commissioned-based broker (who sells products) and not the fee-only advisor that I am (who sells the quality of their advice).

On small value, I have no idea what you are talking about. My only mention of IJS (S&P 600 Value) was to say it has almost 3X less in assets than IWN (Russell 2000 Value), yet is a better small value strategy. Not sure what you are getting all in a tizzy about. That clearly shows that ETFs are measured more on tracking relative to their index than return on factor exposure (as S&P 600 Value Index has 1/2 the negative FF3F alpha than Russell 2000 Value does since 1995).

But generally speaking, all things being equal, more diversification is better than less, especially in asset classes with high volatility and individual stock dispersion. Sure, less diversification can lead to higher highs (like BRSIX from 1997-2003), but also lower lows (like BRSIX from 2004-2011). I prefer not to ride that roller coaster because you might wind up jumping off before the ride is over.

If I were choosing between a 400 stock SV index and a 1000 stock SV index (Vanguard), I'd opt for the later for obvious reasons. Of course, along those same lines, I also think 1500 is better than 1000.

Eric

User avatar
Random Musings
Posts: 5209
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Re: iShares Enters Factor Investing Market in a Big Way

Post by Random Musings » Thu Apr 18, 2013 3:11 pm

EmergDoc wrote:I'd love to have access to a DFA-like fund without having to hire an advisor.
I agree to that thought.

RM
I figure the odds be fifty-fifty I just might have something to say. FZ

OverTheHill
Posts: 308
Joined: Wed Mar 27, 2013 4:58 pm
Location: North Carolina

Re: iShares Enters Factor Investing Market in Big Way

Post by OverTheHill » Thu Apr 18, 2013 3:53 pm

Rick Ferri wrote:Let's not put a halo over anyone's head. There's been a fair amount of jelly throwing in Valley Forge.

Rick Ferri
Rick, what are you saying about value funds? Should folks who have equities invested in SP500 and Total Market shave off a portion and put it in value. Some years ago, I invested in a Vanguard value fund and it performed quite poorly. I decided to just stick with the SP500 and Total Market. On the other hand, I do like to know you're thinking on such subjects. Thanks.

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in a Big Way

Post by Rick Ferri » Thu Apr 18, 2013 3:59 pm

It's up to you which strategy to choose for your portfolio. Here is an article the might help explain how you could use small-value. It's a long-term strategy. I call it a life-long strategy:

Winning with Small Value Stocks

Rick Ferri

.
Last edited by Rick Ferri on Thu Apr 18, 2013 5:20 pm, edited 1 time in total.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

OverTheHill
Posts: 308
Joined: Wed Mar 27, 2013 4:58 pm
Location: North Carolina

Re: iShares Enters Factor Investing Market in a Big Way

Post by OverTheHill » Thu Apr 18, 2013 4:06 pm

Rick Ferri wrote:It's up to you which strategy to choose for your portfolio. Here is an article the might help explain how you could use small-value:

Winning with Small Value Stocks

Rick Ferro
Thanks, Rick. I quickly read the article. It seems like an idea that has some support in the long-term data, but it also seems like something that might not have a lot of support in the long-term data. It just depends on when you start and conclude your data period. In other words, it might make some sense, but I'm not sure it makes a lot of sense, but I'll keep studying the idea anyway. Thanks again.

EDN
Posts: 528
Joined: Sat Dec 29, 2012 7:55 pm
Location: Oklahoma City, OK

Re: iShares Enters Factor Investing Market in a Big Way

Post by EDN » Thu Apr 18, 2013 4:18 pm

Random Musings wrote:
EmergDoc wrote:I'd love to have access to a DFA-like fund without having to hire an advisor.
I agree to that thought.

RM
I know what you are saying, but to defend DFA, we were just treated to this comment above:
Some years ago, I invested in a Vanguard value fund and it performed quite poorly. I decided to just stick with the SP500 and Total Market.
DFA runs strategies that are intensely focused on what they perceive to be the sources of expected returns. Not guaranteed returns, and the likely returns certainly won't show up in every period. In the component space, their value funds are very value oriented, their small funds are very small, and their growth funds hold very highly profitable companies, and all their equity funds screen out any security that isn't fully exposed to the market factor. When these things aren't "working", a more narrow focus is even more painful than a broader focus that Vanguard or others use.

But we see above, even these less focused approaches tend to be given up on after a bad stretch of returns. The average investor doesn't add a fund to their portfolio with the well thought out intention of holding it over a full cycle or even have any concept of what a full cycle is or that there is a cycle. They just noticed returns have been good (better than their current holdings), or catch wind of a positive comment about it, and jump in. And there is simply no way to distinguish between those who would and would not, besides putting a "voice of reason" between the investor and the strategy. FWIW, AQR and Vericemetry and Bridgeway feel the same way.

I get that investors don't like to be told they can't do something or can't have something, that's fair. But if DFA let everyone in the door, this system wouldn't work. They'd look just like Vanguard and then there would be no difference or differentiation. I talk to both companies regularly, and for the most part each one knows what the other one does well and doesn't try to duplicate efforts.

You can get to where you need to be without DFA. The FF model is the android of investing, its open architecture for everyone. Bad behavior is a much bigger cost, and much more pervasive than the drawback of a fund or index that comes up a bit short in the engineering department.

Eric

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in a Big Way

Post by Rick Ferri » Thu Apr 18, 2013 5:26 pm

Some years ago, I invested in a Vanguard value fund and it performed quite poorly. I decided to just stick with the SP500 and Total Market.
DFA tries to stop unnecessary turnover in their funds that hurts long-term investors. That's the primary reason they go through advisers as Eric points out.

In the late 1990s all value funds performed quite poorly relative to the rest of the market, and they'll do it again in the future. Before committing to this strategy you should fully understand this risk. You have to stay with it for the very long-term to benefit (unless you got lucky on timing). That's why I call three-factor investing a life-long strategy.

This discussion brings up a good point. We hear a lot of people complaining because they don't have access to DFA funds. Yet, without an adviser in the middle, gaining access won't matter much to a lot of investors because they won't stick with the strategy after a bad spell in value stocks. So, those folks might as well buy the total market fund and be done with it.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

steve r
Posts: 504
Joined: Mon Feb 13, 2012 8:34 pm

Re: iShares Enters Factor Investing Market in a Big Way

Post by steve r » Thu Apr 18, 2013 5:42 pm

Rick Ferri wrote: ...
iShares is calling their methdology "The Next Level of Investing." The factors are quality, value, size, momentum, and volatility. ...
More choice are a good thing!

Rick Ferri
I am personally a big fan and heavily invested in ACWV ... that focuses on minimizing volatility with a global perspective (ER 0.20).

It is not for everyone.

1) Not for pure believers in indexing. While I am equally heavily invested in market indexes ... I do worry that they tend to overweight stocks that are "overvalued" (AAPL a few months ago) and underweight stocks that are "undervalued."
2) Those that believe you must own everything ... 279 equities from around the world with nothing more than 1 percent or so in any position is enough diversification for me personally.
3) Those uncomfortable of under performing during strong bull markets (late 1990s). I do own a little less bonds (because of reduced volatility), but will still underperforms equity index with bonds during a very strong bull market ...

I like that it focuses on minimizing volatility and that the approach has had solid returns since 1988 (furtherest back I could find testing on). I like 1/3rd less volatility.
http://www.msci.com/resources/factsheet ... -index.pdf

I am invested with the belief that you can minimize volatility .... not that you can do so with equal returns as suggested in the link.

I like the fact that similar approaches had similar results going back many more decades. I like the fact it is globally diversified and sector diversified based on market caps ... (+ or - a few percentage points). In contrast to SPLV (low volatility) that simply buys the least volatile stocks (thus very much overweighted in utilities and consumer defensive). It currently overweights Japan and the US slighly while underweighting Europe. I also like the fact that its Algorithm does this with a global universe of equities as opposed to doing so region by region.
Maximize Diversification - Minimize Costs - Avoid Lotteries

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in a Big Way

Post by Rick Ferri » Thu Apr 18, 2013 5:54 pm

Not for pure believers in indexing. While I am equally heavily invested in market indexes ... I do worry that they tend to overweight stocks that are "overvalued" (AAPL a few months ago) and underweight stocks that are "undervalued."
Let's not go down the path of useless cliques. Cap weighted indexes are not "bias" to growth stocks. Cap weighting does only do one thing - it measures the size of a securities market in dollars. It's like putting a measuring rod down a well to see how deep the water is. There is no "bias" in number. The well doesn't have a no good water or bad water bias - it's ALL water. There is only one number that matters in a cap weighted index, and that number is "market value."

Rick Ferri
Last edited by Rick Ferri on Thu Apr 18, 2013 6:01 pm, edited 1 time in total.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

User avatar
Clearly_Irrational
Posts: 3087
Joined: Thu Oct 13, 2011 3:43 pm

Re: iShares Enters Factor Investing Market in a Big Way

Post by Clearly_Irrational » Thu Apr 18, 2013 6:00 pm

baw703916 wrote:There's already a whole bunch of reasonable SV funds out there, I'm not sure this is much to write home about.
Personally I don't think the current choices are actually that great, their value loading are too small for my taste.

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in a Big Way

Post by Rick Ferri » Thu Apr 18, 2013 6:04 pm

Actually, the right way to measure is "cost per unit if value exposure". But first, you have to decide what value means to you.

Value Stocks are in the Eye of the Beholder

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

steve r
Posts: 504
Joined: Mon Feb 13, 2012 8:34 pm

Re: iShares Enters Factor Investing Market in a Big Way

Post by steve r » Thu Apr 18, 2013 6:21 pm

Rick Ferri wrote:
Not for pure believers in indexing. While I am equally heavily invested in market indexes ... I do worry that they tend to overweight stocks that are "overvalued" (AAPL a few months ago) and underweight stocks that are "undervalued."
Let's not go down the path of useless cliques. Cap weighted indexes are not "bias" to growth stocks. Cap weighting does only do one thing - it measures the size of a securities market in dollars. It's like putting a measuring rod down a well to see how deep the water is. There is no "bias" in number. The well doesn't have a no good water or bad water bias - it's ALL water. There is only one number that matters in a cap weighted index, and that number is "market value."

Rick Ferri
I completely agree with the measuring stick analogy ... I would not call the index measurement one that has "bias" ...

I am at a loss as to how to explain my comment better other than to say that it is more personal comfort issue. I have seen time and again some stock come to dominate indexes that are correctly measured ... AAPL is just a recent example .... I am more comfortable splitting the difference ... owning less of the more volatile stocks ... I do own cap weighted indexes.

Thanks for the post and comment Rick.
Maximize Diversification - Minimize Costs - Avoid Lotteries

User avatar
Rick Ferri
Posts: 8508
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: iShares Enters Factor Investing Market in a Big Way

Post by Rick Ferri » Thu Apr 18, 2013 6:39 pm

A cap weighted index is a measure of the market and index funds that track them are a low-cost way to buy the market. That being said, there is a difference between measuring a market and investing in a market. Cap weighting may not be the best way to invest. That's for each of us to decide - it's called strategy. Whatever way we decide, we do it in a low-cost and broadly diversified manner. That's called philosophy - it's being a Boglehead.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

stlutz
Posts: 4660
Joined: Fri Jan 02, 2009 1:08 am

Re: iShares Enters Factor Investing Market in a Big Way

Post by stlutz » Thu Apr 18, 2013 9:18 pm

I think the advantage to some of these newer strategies is that they oftentimes help one avoid unknown risks, such as making big sector bets. People often fret around here about how low. vol. strategies are just a bet on utilities or value strategies are just a big bet on financials. Fundamentally-weighted funds provide value exposure without the large sector bets; Minimum variance funds provide low. vol. exposure without big sector bets either.

Historical backtesting does show that these types of constraints usually reduce, not increase, the historical returns of the strategies, but going forward, one who wants to bet on value usually wants to make sure that this is what they are investing in as opposed to a sector bet in disguise.

My $.02
the low volatility weighting would create a value tilt in the index.
Rick--you mention this a couple of times in this thread, but currently low vol. weighting will give you a growth tilt in your portfolio. No big point here aside from encouraging people to know what they are investing in.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: iShares Enters Factor Investing Market in a Big Way

Post by avalpert » Thu Apr 18, 2013 9:50 pm

EDN wrote: The odds of going down in a plane crash are not associated at all with how many people are on the plane.
That's not exactly true - the total and distribution of weight in the plane does affect the odds of an accident and of course the number of people on the plane impacts that. So, though it isn't really a linear relationship, there is one. Not saying that this is a good analogy for risk premiums; but it doesn't work the way you are using it either.

Jebediah
Posts: 514
Joined: Tue Aug 28, 2012 9:19 pm
Location: Denver, CO

Re: iShares Enters Factor Investing Market in a Big Way

Post by Jebediah » Thu Apr 18, 2013 11:52 pm

stlutz wrote:I think the advantage to some of these newer strategies is that they oftentimes help one avoid unknown risks, such as making big sector bets. People often fret around here about how low. vol. strategies are just a bet on utilities or value strategies are just a big bet on financials. Fundamentally-weighted funds provide value exposure without the large sector bets; Minimum variance funds provide low. vol. exposure without big sector bets either.

Historical backtesting does show that these types of constraints usually reduce, not increase, the historical returns of the strategies, but going forward, one who wants to bet on value usually wants to make sure that this is what they are investing in as opposed to a sector bet in disguise.

My $.02
the low volatility weighting would create a value tilt in the index.
Rick--you mention this a couple of times in this thread, but currently low vol. weighting will give you a growth tilt in your portfolio. No big point here aside from encouraging people to know what they are investing in.
+1, great post

OverTheHill
Posts: 308
Joined: Wed Mar 27, 2013 4:58 pm
Location: North Carolina

Re: iShares Enters Factor Investing Market in a Big Way

Post by OverTheHill » Fri Apr 19, 2013 9:02 am

avalpert wrote:
EDN wrote: The odds of going down in a plane crash are not associated at all with how many people are on the plane.
That's not exactly true - the total and distribution of weight in the plane does affect the odds of an accident and of course the number of people on the plane impacts that. So, though it isn't really a linear relationship, there is one. Not saying that this is a good analogy for risk premiums; but it doesn't work the way you are using it either.
Another reason, I'm not sure there have been very many plane crashes that didn't have at least one person on board.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: iShares Enters Factor Investing Market in a Big Way

Post by avalpert » Fri Apr 19, 2013 1:35 pm

OverTheHill wrote:
avalpert wrote:
EDN wrote: The odds of going down in a plane crash are not associated at all with how many people are on the plane.
That's not exactly true - the total and distribution of weight in the plane does affect the odds of an accident and of course the number of people on the plane impacts that. So, though it isn't really a linear relationship, there is one. Not saying that this is a good analogy for risk premiums; but it doesn't work the way you are using it either.
Another reason, I'm not sure there have been very many plane crashes that didn't have at least one person on board.
The number of personless crashes is actually pretty long and growing: http://dronewarsuk.wordpress.com/drone-crash-database/

Post Reply