Best Multifactor Funds to use for Tilting/Replacement?

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AndroAsc
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Joined: Sat Nov 21, 2009 7:39 am

Best Multifactor Funds to use for Tilting/Replacement?

Post by AndroAsc » Thu Oct 11, 2018 2:21 pm

I'm trying to compile a list of reasonable/good multifactor funds to use for tilting or replacement of the standard total market index funds. In practice, it will not be a full replacement, since 401ks don't really have these fund options.

Criteria for fund selection will be:
- Low ER (no more than 2-3X more than their index fund counterparts)
- Reasonable AUM, and will be around for many decades
- No stock manager active management. Passive management through algos that are updated/change infrequently aka like DFA funds are ok. Algos should also invest in factors simultaneously and not switch factors from year to year.
- Available to most investors. So no DFA or AQR here since you need $1mil assets to qualify
- Should be fairly tax efficient, since these will be held in taxable accounts

I'm looking at 3 categories: US, International (Developed) and Emerging. Preferably looking for simplicity as well, so one factor-fund to rule them all for each category.

US:
a) Vanguard U.S. Multifactor ETF (VFMF)
b) iShares Edge MSCI Multifactor USA ETF (LRGF) + iShares Edge MSCI Multifactor USA Small-Cap ETF (SMLF)
c) John Hancock Multifactor Large Cap ETF managed by DFA (HML)

International (Developed):
a) iShares Edge MSCI Multifactor USA ETF (INTF) + iShares Edge MSCI Multifactor Intl Small-Cap ETF (ISCF)

Emerging:
a) iShares Edge MSCI Multifactor Emerging Markets ETF (EMGF)

I know there's the Goldman-Sachs activeBeta ETFs, but those are more like a fund of funds of separate factor funds, and not doing an aggregate factor fund screen criteria.

For US, I'm probably going with Vanguard Multifactor fund, and the iShares option for International and Emerging, but simply because I'm not sure if there are better options. What options are you aware of, and what would you use?

HippoSir
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Re: Best Multifactor Funds to use for Tilting/Replacement?

Post by HippoSir » Thu Oct 11, 2018 3:35 pm

After similar requirements and a lot of (probably too much) research, I arrived at largely the same list of funds and went with: VFMF+INTF+ISCF+EMGF. I'm using INTF+ISCF+EMGF as a replacement for any other fund, and VFMF as a tilt (combined with VTSAX).

Note the ishares funds seem relatively light on factors compared to vanguard funds so may be more suitable as a replacement rather than tilt. Their performance has generally been only slightly better than the indexes they choose from as far as I can tell.

I'm hoping vanguard moves into the international multifactor space, their ER is attractive and they seem to have deep factor exposure. I personally don't like the "sleeve" approach that the Goldman funds (and others use) so I've avoided them entirely.

Wisdomtree has some interesting international multifactor funds:

https://www.wisdomtree.com/etfs/equity/emmf
https://www.wisdomtree.com/etfs/equity/dwmf

But they're very new and have minimal AUM. Considering I've already had trouble trading ISCF, I have no desire to go any smaller.

AndroAsc
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Joined: Sat Nov 21, 2009 7:39 am

Re: Best Multifactor Funds to use for Tilting/Replacement?

Post by AndroAsc » Thu Oct 11, 2018 10:25 pm

HippoSir wrote:
Thu Oct 11, 2018 3:35 pm
After similar requirements and a lot of (probably too much) research, I arrived at largely the same list of funds and went with: VFMF+INTF+ISCF+EMGF. I'm using INTF+ISCF+EMGF as a replacement for any other fund, and VFMF as a tilt (combined with VTSAX).

Note the ishares funds seem relatively light on factors compared to vanguard funds so may be more suitable as a replacement rather than tilt. Their performance has generally been only slightly better than the indexes they choose from as far as I can tell.

I'm hoping vanguard moves into the international multifactor space, their ER is attractive and they seem to have deep factor exposure. I personally don't like the "sleeve" approach that the Goldman funds (and others use) so I've avoided them entirely.

Wisdomtree has some interesting international multifactor funds:

https://www.wisdomtree.com/etfs/equity/emmf
https://www.wisdomtree.com/etfs/equity/dwmf

But they're very new and have minimal AUM. Considering I've already had trouble trading ISCF, I have no desire to go any smaller.
How do you figure out whether the funds are light or heavy on factors? Is there any tools that can be used?

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jhfenton
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Re: Best Multifactor Funds to use for Tilting/Replacement?

Post by jhfenton » Fri Oct 12, 2018 9:52 am

HippoSir wrote:
Thu Oct 11, 2018 3:35 pm
Note the ishares funds seem relatively light on factors compared to vanguard funds so may be more suitable as a replacement rather than tilt. Their performance has generally been only slightly better than the indexes they choose from as far as I can tell.

I'm hoping vanguard moves into the international multifactor space, their ER is attractive and they seem to have deep factor exposure. I personally don't like the "sleeve" approach that the Goldman funds (and others use) so I've avoided them entirely.
I agree with all of this.

I'm using VFMF/VMFMX and VFVA (the single-factor value fund) for all of our non-401(k) U.S. and EMGF for some of our emerging markets. I also still have quite a bit of vanilla VEMAX/Vanguard FTSE Emerging Markets Index Admiral.

For the rest of ex-US, we own VSS (Vanguard FTSE All-World ex-US Small Cap). It's our largest holding. I have my eye on ISCF, but I don't find it as compelling as EMGF.

We also have DFSTX/DFA US Small Cap I and VMVAX/Vanguard Mid Cap Value Index Admiral in my 401(k), and a little bit of VTIAX/Vanguard Total International in my wife's new 401(k). Why? Because they are the only reasonable choices.

I also hope Vanguard moves into the international (multi)factor space with their Quantitative Equity Group. I really like the design of their new factor funds.

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