5-Yr Later: How to slice and dice momentum and new factors into my portfolio?

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AndroAsc
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5-Yr Later: How to slice and dice momentum and new factors into my portfolio?

Post by AndroAsc » Sun Oct 07, 2018 8:41 pm

I've not changed my portfolio for the last 5 yrs, but it looks like Vanguard has momentum funds (when did that happen)? So is momentum like a "real thing" now?

Currently I have 80/20 Stock/Bond split. Of the stocks:

22.5% - US Total Market (VTSAX)
7.5% - US Factor Tilt (currently High Quality / Small Value) (VDADX, RZV)
7.5% - US REITs (VNQ)
15.0% - International Total Market (VTIAX)
10.0% - Emerging Total Market (VWO)
7.5% - International Factor Tilt (currently Small Value) (VSS, EWX)
5.0% - International REITs (VNQI)
5.0% - Commodities (USCI)

It adds up to 80% FYI, and its 50/50 split between US vs International stocks, and a small 5% in commodities.

I'm thinking of re-evaluating what factors I should tilt too (those bolded). Obviously, its constrained by what implementations are out there and if the extra fees are worth it, and if it will work well in a taxable environment.

For US-based equities, I'm tilting towards GMO "high quality" using VDADX and also small-value using RZV. Is this worth continuing, or should I tilt towards momentum now? Is there like a high quality, small value with momentum fund out there? On the Vanguard vs DFA website there is the addition of:
- Invesco S&P 500 Value with Momentum ETF (SPVM)
- Vanguard U.S. Value Factor ETF (VFVA)

Would it make sense to use this to tilt towards value+momentum also?

For International-based equities, I'm tilting towards small cap / small value using VSS and EWX. Are there any new implementations of international (developed) and emerging funds for other factors?

HEDGEFUNDIE
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Re: 5-Yr Later: How to slice and dice momentum and new factors into my portfolio?

Post by HEDGEFUNDIE » Sun Oct 07, 2018 8:56 pm

ISCF and EMGF for international

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AlexisAtEasternState
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Re: 5-Yr Later: How to slice and dice momentum and new factors into my portfolio?

Post by AlexisAtEasternState » Sun Oct 07, 2018 11:50 pm

Assuming no tax consequences, I would replace all US assets you want to invest with a factor tilt to Vanguard's multi factor product (VFMF / VFMFX) for the following reasons:
  • Deeper factor tilts
  • Considers interaction between factors (value suffers from negative momentum. As you allude to mentioning Invesco's fund, a multifactor approach results in a lower likelihood long periods of underperformance.
  • Momentum considered - addresses your main question.
  • Low fee = 18 bp
  • Largecap / Midcap / Smallcap fixed weights (1/3 each)
See this paper from S&P - The Merits and Methods of Multi-Factor Investing or the relevant academic literature.

jclear
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Re: 5-Yr Later: How to slice and dice momentum and new factors into my portfolio?

Post by jclear » Mon Oct 08, 2018 12:25 am

Vanguard multifactor VFMF/VFMFX is supposed to incorporate value, momentum, and quality. Looking at how the portfolio is constructed, it has some small tilt, and a fundamental indexing bent. The other factor ETFs are small tilted too while not being a pure small play, just like Vanguard's small value fund. Considering that value and quality usually have clear negative correlation, and the score percentile methodology used in its construction, momentum should be the primary of the three ingredients. We only have about 8 months of returns, so it's not clear yet if it's working out that way. All the Vanguard factor ETFs have low AUM right now, so it's unclear if they will maintain their ER or get dropped.

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AlexisAtEasternState
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Re: 5-Yr Later: How to slice and dice momentum and new factors into my portfolio?

Post by AlexisAtEasternState » Thu Oct 18, 2018 8:45 pm

jclear wrote:
Mon Oct 08, 2018 12:25 am
Considering that value and quality usually have clear negative correlation, and the score percentile methodology used in its construction, momentum should be the primary of the three ingredients
Value, quality, and momentum are given equal weight into weighting decisions within each market cap bucket.
Full methodology source: https://advisors.vanguard.com/iwe/pdf/FASFMTH.pdf

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