PowerShares S&P 500 Value with Momentum ETF (SPVM)

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Sammy_M
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PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by Sammy_M » Sun May 07, 2017 6:15 am

I am interested in thoughts on the captioned new Value + Momentum fund that has a 0.30% ER. Mine are that while non-diversified, it should have strong Value and Momentum characteristics. It will be interesting to see once it has a longer history.
SPVM seeks to track the S&P 500 High Momentum Value Index, which is designed to measure the performance of 100 stocks within the S&P 500® with attractive valuations that have also demonstrated positive momentum.
The first step screens for value based on three price metrics: price-to-book, price-to-earnings and price-to-sales. The resulting stock universe is then assigned a value score, with the 200 most attractively valued stocks selected for a momentum screen. From the 200 stocks, the 100 with the highest positive momentum score are then selected for inclusion in the index. Stocks are weighted by their value score and rebalanced semiannually.
This enhanced methodology is designed to provide a more robust approach to the value factor. By using a momentum overlay, SPVM's underlying methodology seeks to identify early movers with upward price movement while also avoiding value traps, instances when a stock appears cheap because it is trading at low multiples of earnings, cash flow or book value, but the stock price remains low and doesn't improve.
http://www.morningstar.com/news/pr-news ... ineup.html

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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by nisiprius » Sun May 07, 2017 7:36 am

Sammy_M wrote:...it should have strong Value and Momentum characteristics...
According to Jared Kizer, that would be "practically impossible:"
in 2015, Jared Kizer wrote:Some factor premia have negative correlation with each other, namely value and momentum. Practically, it is impossible, therefore, to own a stock portfolio that is both deeply tilted toward value and deeply tilted toward momentum.... More generally, it is not feasible to build portfolios that capture significant amounts of multiple factor premia.
It's not so easy as looking for a fund that has it all, i.e. all the currently fashionable factors.
Sammy_M wrote:...while non-diversified...
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The Fund is “non-diversified” and therefore is not required tomeet certain diversification requirements under the Investment Company of 1940, as amended (the “1940 Act”).
Indeed, it isn't. I don't think that should be a casual aside, in my opinion this is a red flag. While this is of course perfectly legal, this should be considered a yellow flag. I would guess that most Bogleheads have never owned a mutual fund that was "non-diversified." It puts the ETF into a fundamentally different, higher-risk category than your ordinary mutual fund or ETF. The Investment Company Act of 1940 usually imposes three requirements to protect fund owners: a) limits on leverage, b) requirements for liquidity in the underlying assets, and c) diversification (no more than 5% of its eggs in any basket, and not allowed to own more than 10% of the shares of any stock). Non-diversified funds and ETFs are meeting only two out of three.
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Sammy_M
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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by Sammy_M » Sun May 07, 2017 8:34 am

No arguments there. IF I were to use this fund, it would be a very small allocation in my IRA, complementing TSM in my 401K, to help achieve my desired value tilt. SPVM will probably be about as concentrated as the Guggenheim Pure Value ETFs. You/Jared are likely right that it will not necessarily have high momentum tilt, but it will likely avoid the negative momentum that the Pure Value ETFs have experienced. And I'm guessing the methodology will still deliver pretty strong Value tilt.

1. Select 200 most valuey stocks of the S&P 500 based on P/B, P/E, P/S
2. Take out the half that have the most negative momentum, and then
3. Weight the remaining based on value-ness.

The highest weighted stock is now just under 2%. The fund is heavily weighted to the financial sector though (33%), and it is notable that it is light on energy value stocks, because of negative momentum.

I'm going to stick with S&P 900 Value (IUSV) for Value exposure now, but will keep an eye on this one.

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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by stlutz » Sun May 07, 2017 10:57 am

I would guess that most Bogleheads have never owned a mutual fund that was "non-diversified." It puts the ETF into a fundamentally different, higher-risk category than your ordinary mutual fund or ETF...
I think there is an over-reaction to the "non-diversified" issue. Actually a number of "factor" funds are registered as non-diversified. RZV is another ETF that has been discussed on and off over the years. It is non-diversified. But even more "boring" funds can be non-diversified. Originally iShares has registered their Russell top 200 (largest 200 companies by market cap--well over 50% of the total market) as "non-diversified". (They later changed it to be diversifed, however).

SPVM weights companies by their "value score" which can result in a higher level of concentration. The same occurs with the S&P "pure" style funds like RZV, RSP etc.

When the prospectus says the fund is non-diversified, I would treat that as saying, "not suitable as the core investment in your portfolio." On the other hand, it would not be dangerous to use this as a smaller supplemental holding to, say, VTI.

Will be interesting to see how the fund does in real life. I looked at the fact sheet on the index-provider's website (http://us.spindices.com/indices/strateg ... ntum-value), and the back-caclulated index has outperformed the market over the past 10 years but non on a risk-adjusted (Sharpe ratio) basis.

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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by lack_ey » Sun May 07, 2017 11:30 am

This seems reasonable enough (probably won't have much momentum at all and possibly even negative, probably will be reasonably value). It's a new launch with only $2.52 million in AUM, though, so it's not something I would seriously consider. Also, 0.30% in ER is pretty high for a US large cap fund of any kind.

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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by 2pedals » Sun May 07, 2017 11:47 am

SPVM's underlying methodology seeks to identify early movers with upward price movement while also avoiding value traps, instances when a stock appears cheap because it is trading at low multiples of earnings, cash flow or book value, but the stock price remains low and doesn't improve.
Really?, is the S&P 500 so market full of value traps that this non-diversified approach with higher ER pay off in the long run. I don't think it's worth is the extra risk.

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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by lack_ey » Sun May 07, 2017 12:07 pm

2pedals wrote:Really?, is the S&P 500 so market full of value traps that this non-diversified approach with higher ER pay off in the long run. I don't think it's worth is the extra risk.
Wait, what's the risk you see here, screening out half of the 200 stocks? Or screening out 300 of the 500? Also, is there really that large of an impact from being "non-diversified" in the legal/regulatory sense here in terms of actual investment behavior?

The way I see it, just about any ~100 stocks from the S&P 500 without extreme sector biases will not be substantially that much riskier than the market in a way that needs calling out. You do lose some diversification but impact of idiosyncratic single-stock risks should still be pretty low and most of the additional risk if any is by the nature of the design and intended exposures (an effective tilt away from the largest stocks, perhaps some from tilting value, etc.).

I mean, I don't really think the S&P 500 is full of value traps either but people aren't really focused on that marketing spin here anyway.

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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by 2pedals » Sun May 07, 2017 12:52 pm

lack_ey wrote: The way I see it, just about any ~100 stocks from the S&P 500 without extreme sector biases will not be substantially that much riskier than the market in a way that needs calling out. You do lose some diversification but impact of idiosyncratic single-stock risks should still be pretty low and most of the additional risk if any is by the nature of the design and intended exposures (an effective tilt away from the largest stocks, perhaps some from tilting value, etc.).

I mean, I don't really think the S&P 500 is full of value traps either but people aren't really focused on that marketing spin here anyway.
Several risks that this fund will not beat the TSM, among them are high turnover, which brings with it transaction costs, value risk, industry concentration risk, non-correlation risk, and momentum investing risk. This fund attempts to down select the market of 500 stock to 200 and then does a momentum weight on 100 stocks and rebalanced semiannually.

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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by Sammy_M » Sun May 07, 2017 2:11 pm

2pedals wrote:Several risks that this fund will not beat the TSM, among them are high turnover, which brings with it transaction costs, value risk, industry concentration risk, non-correlation risk, and momentum investing risk. This fund attempts to down select the market of 500 stock to 200 and then does a momentum weight on 100 stocks and rebalanced semiannually.
Note the 200 most valuey of the S&P500 are filtered using a momentum screen to get to 100, but then they are weighted based on value screens. They are not weighted based on momentum.

Anyone considering this fund should already be committed to a value tilted strategy for the long haul. The question then becomes is it a superior vehicle to achieve ones desired value tilt. It should not be considered as an alternative to the S&P500 or TSM. It would be a potential alternative to VTV, IUSV, FNDX, RPV, etc. (See regressions at Portfolio Visualizer)

30 basis points is not a lot in comparison to RAFI ETFs which are around 25, and do not explicitly handle momentum. It potentially avoids having to add a fund like MTUM.

100 stocks is not as broad as many value indices. However, if you increase the count, you are going to get a less valuey or more negative momentum fund. IIRC, avoiding negative momentum has been more beneficial than adding exposure to positive momentum.

With a more factor sensitive fund, you can use less of it, leaving the remainder of your portfolio for total market funds. This can be very helpful if you do not have value funds in your 401K. I have total market and small index funds, but no value index ones.

I would only hold this in tax advantaged given turnover, i.e. IRA, and I would not touch it until it gets reasonable volume.

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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by Theoretical » Sun May 07, 2017 3:05 pm

It's relatively doable to get momentum to neutral or mildly positive (S&P 600 value, the PIMCO take on RAFI funds, Bridgeway and DFA, and several "active" value funds) and AQR/Bridgeway manage to make momentum value-neutral, but so far the multifactor funds look great in theory but appear to be very "meh" in giving you lots of B and C factor loadings for a worse price than you'd get with just a total market fund.

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Re: PowerShares S&P 500 Value with Momentum ETF (SPVM)

Post by 2pedals » Sun May 07, 2017 3:12 pm

Sammy_M wrote: Note the 200 most valuey of the S&P500 are filtered using a momentum screen to get to 100, but then they are weighted based on value screens. They are not weighted based on momentum.
Yes, I stand corrected, weights are based on value screens :beer

1) starts with S%P 500 stocks (large cap stocks)
2) selects the 200 stocks with the highest value scores for further screening
3) momentum score of each of the remaining 200 based on recent stock price performance, sorts for momentum and takes the top 100
4) Weights the remaining stocks based on highest values scores (#2).

So large cap value stocks are included and weighted by value, if and only if recent stock price performance is better than the other 100 stocks. So it is possible that several "highly scored" value stocks might be eliminated from the ETF because recent stock price performance is poor over the last six months. Also among these "highly scored" values stocks that were eliminated recent stock price performance could easily change so that these market laggards become market leaders. How do I know this higher ER ETF approach would beat the TSM in next 10-20 years? I am not willing to place my money on that.

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