Morningstar: What to Consider When Picking Multifactor ETFs

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MJW
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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by MJW » Thu Jul 05, 2018 7:49 pm

My understanding of factors is relatively basic, but it seems like characterizing a total stock market index fund as having "all the factors" misses the mark. I do understand the skepticism, however, that one might have regarding multi-factor funds and their ability to behave much differently than the total market, as opposed to picking one or two factors with conviction and sticking with them. I will be interested to see how these funds perform over a longer period of time.

A couple of random questions for those of you using multi-factor funds and/or are better-versed on the subject:

1. Are there any "one factor to rule them all" characteristics of certain factors? That is, do certain factors by nature (or by exception) exhibit features of other factors as well? Just intuitively it seems like this could be the case with some minimum volatility or high quality funds. I know Portfolio Visualizer gives you some tools to investigate this sort of thing. Has anything of note stood out?

2. Do any of you use a multi-factor fund to complement a core position of index funds for the purpose of tilting to small and/or international? For example, say you wanted international exposure from something other than Total International Index, and you use US-TSM index as your core position and then add an international or global multi-factor fund.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by jhfenton » Thu Jul 05, 2018 8:45 pm

MJW wrote:
Thu Jul 05, 2018 7:49 pm
1. Are there any "one factor to rule them all" characteristics of certain factors? That is, do certain factors by nature (or by exception) exhibit features of other factors as well? Just intuitively it seems like this could be the case with some minimum volatility or high quality funds. I know Portfolio Visualizer gives you some tools to investigate this sort of thing. Has anything of note stood out?
Not within a framework. Models vary, but within any given model each factor is supposed to describe a unique source of return. Between models, you could say yes. Since the Fama-French three-factor model in 1993 and four-factor model in 1997, there have been countless competing factor models with varying numbers of factors and varying degrees of explanatory power. You can see overlap and duplication among factors in different models.
MJW wrote:
Thu Jul 05, 2018 7:49 pm
2. Do any of you use a multi-factor fund to complement a core position of index funds for the purpose of tilting to small and/or international? For example, say you wanted international exposure from something other than Total International Index, and you use US-TSM index as your core position and then add an international or global multi-factor fund.
I don't care about holding traditional so-called "core" funds, but I see a multifactor fund as a reasonable substitute for a core fund.

At this point, we hold roughly equal amounts of VFMFX (Vanguard US Multifactor Admiral), VFVA (Vanguard US Value Factor), VMVAX (Vanguard Mid Cap Value Index Admiral), and DFSTX (DFA US Small Cap I). The latter two are 50% each of my 401(k). In total, the four funds are 98.2% of our US equity holdings. The only other holding is a tiny position in VIOV (Vanguard S&P 600 Value) in taxable.

If not for 401(k) limitations, I would seriously consider splitting our U.S. allocation between VFMFX and VFVA and calling it a day for simplicity. Both funds include the size tilts that traditionally require separate funds.

On the international side, I consider our core position to be VSS/VFSVX (Vanguard FTSE all-World ex-US Small Cap) (aka total international small cap), which makes up 58.7% of our international. Exactly 1.2% of our international is in VTIAX (Vanguard Total International Admiral) in my wife's new 401(k). The other 40% is in emerging markets, either Vanguard's VEMAX/VWO in our Vanguard accounts and EMGF (iShares Edge MSCI Multifactor Emerging Markets ETF) in my HSA at TD Ameritrade. (I like EMGF, but at 45 bp, I won't put all of my emerging markets in it.)

I would love, of course, an international version of VFMFX, but in the meantime, I'm happy with VSS/VFSVX as a core holding. Our allocation to VTIAX will obviously grow now that 100% of my wife's 401(k) is going into it, and that's fine too. I had just eliminated it (or developed large cap international) for the sake of simplicity.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by CULater » Thu Jul 05, 2018 9:29 pm

All the factors have to be in the total market, from whence they are distilled. It's just that the amount of the total market variance that many of them account for is pretty small. So, you can cull out stocks that load on a particular factor and get more juice from that factor. Or you can do that for several statistical factors; ideally factors that are orthogonal or perhaps oblique with a negative relationship. All this, of course, depends on those same factors showing up in the future, and on how effectively fund managers are able to manage their selection of stocks that load on the factors going forward. It seems like tricky business to some.
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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by triceratop » Thu Jul 05, 2018 9:55 pm

CULater wrote:
Thu Jul 05, 2018 9:29 pm
All the factors have to be in the total market, from whence they are distilled. It's just that the amount of the total market variance that many of them account for is pretty small. So, you can cull out stocks that load on a particular factor and get more juice from that factor. Or you can do that for several statistical factors; ideally factors that are orthogonal or perhaps oblique with a negative relationship. All this, of course, depends on those same factors showing up in the future, and on how effectively fund managers are able to manage their selection of stocks that load on the factors going forward. It seems like tricky business to some.
Factors are not all in the total market. Factors are long-short portfolios, i.e. market beta \approx 0.

However, it is possible for long-only portfolios with beta \approx 1 to have exposure to factor returns, by loading on parts of the market that correspond to the long part of those factor portfolios. That is definitely not the same as those long-only portfolios being the factor.

This is all very clearly laid out in any of the many books published on this topic.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by jalbert » Fri Jul 06, 2018 1:48 am

One point to consider carefully if deciding to use one of the new multi-factor ETFs as a core holding is: will they have enough liquidity to support portfolio withdrawals when in retirement? If you are near or in retirement then current liquidity may be a concern with some of these. If you have 10+ years to retirement then you may face an uncertain future with respect to these funds.

I’m not saying not to consider investing in a multi-factor ETF as a core holding, but one advantage of a market index fund is that it is unlikely that liquidity will limit your ability to manage realization of retirement income from your portfolio.
Index fund investor since 1987.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by vineviz » Fri Jul 06, 2018 7:42 am

CULater wrote:
Thu Jul 05, 2018 9:29 pm
All the factors have to be in the total market, from whence they are distilled. It's just that the amount of the total market variance that many of them account for is pretty small.
It's more profound than that.

If you want to think about "all the factors" being in the total market, you have to also think about all the anti-factors as being in the market too: the return factors get cancelled out so the net amount of factors in a total market index is zero.

Imagine you had a manufacturing application where red light caused some hypothetical compound to solidify and cyan light caused it to liquify. If the instructions tell you to use red light to harden the compound you can see that it would be foolish to grab a white light to use under the theory that "white light has all the colors", right? The red wavelengths and cyan wavelengths would cancel each other out, and you'd get nothing.

While it's true, in some esoteric sense, that the market includes all the factors it is equally true that the market includes none of the benefits of the factors.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by Park » Fri Jul 06, 2018 7:50 am

https://www.morningstar.com/articles/87 ... ifact.html

"Goldman Sachs ActiveBeta International Equity ETF (GSIE) is a good way to stay diversified across regions and factors and improve expected returns.

This fund offers similar exposure to the MSCI World ex USA Index but tilts toward stocks with characteristics that have historically been associated with market-beating performance. These include low valuations, strong momentum, high profitability, and low volatility...

The resulting portfolio looks a lot like the MSCI World ex USA Index. It includes more than 840 stocks out of around 1,000 eligible names, with an active share of only 34%. These holdings have a smaller average market capitalization than the constituents of its parent index. However, they tend to trade at similar valuations. This is because the fund's momentum and quality sleeves pull the portfolio toward pricier names, while its value sleeve leans in the other direction."

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by Taylor Larimore » Fri Jul 06, 2018 7:54 am

Bogleheads:

To really understand "Factor" investing, read this:

FACTS AND FANTASIES ABOUT FACTOR INVESTING

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by vineviz » Fri Jul 06, 2018 8:34 am

Taylor Larimore wrote:
Fri Jul 06, 2018 7:54 am
Bogleheads:

To really understand "Factor" investing, read this:

FACTS AND FANTASIES ABOUT FACTOR INVESTING

Best wishes.
Taylor
That's a good example of a marketing brochure being disguised as an academic paper.

I wonder if the authors' conclusion that "factor investing is not as simple as it is sometimes presented by practitioners" has anything to do with the fact that Lyxor Asset Management (the asset management company employing the authors) manages and sells factor-based ETFs?

https://www.lyxoretf.co.uk/en/instit/pr ... fy-factors
Equity factors have long been recognised by investors and academics alike for their long-term diversification benefits and their performance-enhancing potential. Our factor-based ETFs can help you fine-tune your portfolio by targeting not only a specific region, but a specific type of stock too. Choose value or growth individually, or a combination of all five factors in a multifactor fund.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by AlohaJoe » Fri Jul 06, 2018 8:44 am

jalbert wrote:
Fri Jul 06, 2018 1:48 am
One point to consider carefully if deciding to use one of the new multi-factor ETFs as a core holding is: will they have enough liquidity to support portfolio withdrawals when in retirement? If you are near or in retirement then current liquidity may be a concern with some of these. If you have 10+ years to retirement then you may face an uncertain future with respect to these funds.
I don't really understand this. How could they possibly be limited by liquidity to such an extent that the tiny withdrawals needed for an individual's retirement withdrawals are impacted?

I've personally traded factor ETFs over $100,000 in a single day and my trades were an infinitesimal blip in their liquidity.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by indexonlyplease » Fri Jul 06, 2018 9:23 am

From Vanguard site

What are "factor based" funds?
Factor-based funds are a form of active management. They offer the potential to achieve specific risk and return objectives by purposely and explicitly "tilting" portfolios toward certain stock characteristics, like recent momentum, higher quality, or lower stock prices.
But they come with significantly more risk than you'd experience investing in the broader stock market.
A few things to think about before you invest
Factor funds are high-risk investments that should be used only by investors who:
Fully understand the risks and potential benefits of each factor.
Can financially and emotionally handle higher degrees of risk.
Consider these funds to be long-term investments.
Factor returns can be cyclical, so you could experience sharp and lengthy periods of underperformance compared with the broader stock market.
If you have questions about whether factor funds might help meet your investment goals, we strongly recommend that you consult with a qualified investment advisor.

Those 2 are bad enough. What will be considered lengthy underperformance(years). I am out since I don't understand.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by vineviz » Fri Jul 06, 2018 9:33 am

AlohaJoe wrote:
Fri Jul 06, 2018 8:44 am
jalbert wrote:
Fri Jul 06, 2018 1:48 am
One point to consider carefully if deciding to use one of the new multi-factor ETFs as a core holding is: will they have enough liquidity to support portfolio withdrawals when in retirement? If you are near or in retirement then current liquidity may be a concern with some of these. If you have 10+ years to retirement then you may face an uncertain future with respect to these funds.
I don't really understand this. How could they possibly be limited by liquidity to such an extent that the tiny withdrawals needed for an individual's retirement withdrawals are impacted?
Yep.

The true measure of an ETF's liquidity is gauged by the liquidity of the underlying stocks and not by the trading history of the ETF itself. This is partly because ETFs tend to have huge hidden orders in their order books, and partly because authorized participants can readily and easily exchange baskets of underlying stocks for the ETF itself.

https://am.jpmorgan.com/blob-gim/138327 ... uidity.pdf
  • Many investors believe that individual stocks and exchange-traded funds (ETFs) share similar liquidity traits, but ETFs are fundamentally different. Their robust liquidity characteristics are frequently misunderstood.
  • A common myth is that small ETFs or those with low trading volume are, by definition, illiquid. Thanks to arbitrage mechanisms that enable ETFs to continuously trade at or near intrinsic value, ETF liquidity is primarily determined by an ETF’s underlying securities. Therefore, small or thinly traded ETFs can, in fact, be highly liquid instruments.
  • Investors who trade ETFs often mistakenly assume that a stock exchange’s order book represents a complete and accurate picture of secondary market ETF liquidity. But the reality is that ETF liquidity often far exceeds what may be displayed “on screen."
The creation basket for U.S. Multifactor ETF (VFMF) includes stocks like HP Inc, Bank of America Corp, AT&T Inc, Morgan Stanley, Delta Air Lines Inc, and Walmart Inc among its top holdings. Not exactly illiquid names.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by vineviz » Fri Jul 06, 2018 9:49 am

indexonlyplease wrote:
Fri Jul 06, 2018 9:23 am
From Vanguard site

What are "factor based" funds?
Factor-based funds are a form of active management. They offer the potential to achieve specific risk and return objectives by purposely and explicitly "tilting" portfolios toward certain stock characteristics, like recent momentum, higher quality, or lower stock prices.
But they come with significantly more risk than you'd experience investing in the broader stock market.
A few things to think about before you invest
Factor funds are high-risk investments that should be used only by investors who:
Fully understand the risks and potential benefits of each factor.
Please don't base your investment strategy on a legal disclaimer.

I totally endorse the idea that people should invest only in things they understand. But the idea that factor investing is inherently more risky than other forms of investing is a misunderstanding. A factor-based fund CAN be risky, but then again so can other approaches including market cap weighted index funds.

On its "Risk Potential" scale of 1 (lowest risk) to 5 (highest risk), Vanguard gives its U.S. Multifactor Fund (VFMFX) a rating of 4, which they categorize as "Moderate to Aggressive".

Some popular funds they rate as 5 ("Aggressive") include Total International Stock Index, Tax-Managed Small-Cap, International Dividend Appreciation Index, and PRIMECAP Fund.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by indexonlyplease » Fri Jul 06, 2018 10:05 am

vineviz wrote:
Fri Jul 06, 2018 9:49 am
indexonlyplease wrote:
Fri Jul 06, 2018 9:23 am
From Vanguard site

What are "factor based" funds?
Factor-based funds are a form of active management. They offer the potential to achieve specific risk and return objectives by purposely and explicitly "tilting" portfolios toward certain stock characteristics, like recent momentum, higher quality, or lower stock prices.
But they come with significantly more risk than you'd experience investing in the broader stock market.
A few things to think about before you invest
Factor funds are high-risk investments that should be used only by investors who:
Fully understand the risks and potential benefits of each factor.
Please don't base your investment strategy on a legal disclaimer.

I totally endorse the idea that people should invest only in things they understand. But the idea that factor investing is inherently more risky than other forms of investing is a misunderstanding. A factor-based fund CAN be risky, but then again so can other approaches including market cap weighted index funds.

On its "Risk Potential" scale of 1 (lowest risk) to 5 (highest risk), Vanguard gives its U.S. Multifactor Fund (VFMFX) a rating of 4, which they categorize as "Moderate to Aggressive".

Some popular funds they rate as 5 ("Aggressive") include Total International Stock Index, Tax-Managed Small-Cap, International Dividend Appreciation Index, and PRIMECAP Fund.
Yes, I am reading more to understand factor investing. Thanks for the reply.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by AlohaJoe » Fri Jul 06, 2018 9:19 pm

vineviz wrote:
Fri Jul 06, 2018 9:49 am
indexonlyplease wrote:
Fri Jul 06, 2018 9:23 am
From Vanguard site

What are "factor based" funds?
Factor-based funds are a form of active management. They offer the potential to achieve specific risk and return objectives by purposely and explicitly "tilting" portfolios toward certain stock characteristics, like recent momentum, higher quality, or lower stock prices.
But they come with significantly more risk than you'd experience investing in the broader stock market.
A few things to think about before you invest
Factor funds are high-risk investments that should be used only by investors who:
Fully understand the risks and potential benefits of each factor.
Please don't base your investment strategy on a legal disclaimer.
To elaborate on this point, when I read the risks part of any prospectus I find it pretty worthless because they list every risk under the sun with no real indication of their relative severity of likelihood.

For instance, here are (some of) the risks from the Vanguard Total Stock Market fund that everyone is more than happy to blindly invest in. (How many people even bother to read the prospectus? I certainly never did.)
  • "Each Fund may invest in foreign securities to the extent necessary to carry out its investment strategy". Do you understand why & under what circumstances the TSM would do this?
  • "the Funds may invest, to a limited extent, in derivatives, including equity futures. The Funds may also use derivatives such as total return swaps to obtain exposure to a stock, a basket of stocks, or an index". Do you understand how this works? What the risks actually are? How it might impact your money? Or are you basically just trusting that Vanguard knows what they are doing with some fancy financial engineering that you know nothing about?
  • "Under certain circumstances, including under stressed market conditions, there are additional tools that each Fund may use in order to meet redemptions, including advancing the settlement of market trades with counterparties to match investor redemption payments." What does "advancing the settlement of market trades with counterparties to match investor redemption payments? How does it affect how quickly you get your money?
  • "Each Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund‘s best interest". Okay, so apparently they can just decide to invest 100% in something that is not the US Total Stock Market if they feel it is in the fund's best interests. Do you fully understand what this means in practice?
The reality is that even apparently simple funds, like a domestic total stock market fund run by Vanguard has a fair amount of black box stuff happening inside of it. I suppose a very dedicated & knowledgeable person might understand all of it. But I'm pretty sure that 99% of people investing in the TSM couldn't explain its use of derivatives or what risk they pose to your TSM holdings.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by jalbert » Fri Jul 06, 2018 10:13 pm

AlohaJoe wrote:
Fri Jul 06, 2018 8:44 am
jalbert wrote:
Fri Jul 06, 2018 1:48 am
One point to consider carefully if deciding to use one of the new multi-factor ETFs as a core holding is: will they have enough liquidity to support portfolio withdrawals when in retirement? If you are near or in retirement then current liquidity may be a concern with some of these. If you have 10+ years to retirement then you may face an uncertain future with respect to these funds.
I don't really understand this. How could they possibly be limited by liquidity to such an extent that the tiny withdrawals needed for an individual's retirement withdrawals are impacted?

I've personally traded factor ETFs over $100,000 in a single day and my trades were an infinitesimal blip in their liquidity.
I was recently looking at INTF which was trading at a 22 bp premium to NAV with a significant bid-ask spread to boot.
Index fund investor since 1987.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by AlohaJoe » Fri Jul 06, 2018 10:29 pm

jalbert wrote:
Fri Jul 06, 2018 10:13 pm
AlohaJoe wrote:
Fri Jul 06, 2018 8:44 am
jalbert wrote:
Fri Jul 06, 2018 1:48 am
One point to consider carefully if deciding to use one of the new multi-factor ETFs as a core holding is: will they have enough liquidity to support portfolio withdrawals when in retirement? If you are near or in retirement then current liquidity may be a concern with some of these. If you have 10+ years to retirement then you may face an uncertain future with respect to these funds.
I don't really understand this. How could they possibly be limited by liquidity to such an extent that the tiny withdrawals needed for an individual's retirement withdrawals are impacted?

I've personally traded factor ETFs over $100,000 in a single day and my trades were an infinitesimal blip in their liquidity.
I was recently looking at INTF which was trading at a 22 bp premium to NAV with a significant bid-ask spread to boot.
Telling a retiree "you might need to wait a few days to make that $10,000 sell to fund the next few months of expenses unless you're willing to lose $22 due to the premium over NAV" doesn't sound like something I'd lose sleep over. But I guess reasonable people can agree to disagree on that.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by CULater » Sat Jul 07, 2018 7:31 am

indexonlyplease wrote:
Fri Jul 06, 2018 9:23 am
From Vanguard site

What are "factor based" funds?
Factor-based funds are a form of active management. They offer the potential to achieve specific risk and return objectives by purposely and explicitly "tilting" portfolios toward certain stock characteristics, like recent momentum, higher quality, or lower stock prices.
[b
]But they come with significantly more risk than you'd experience investing in the broader stock market.[/b]
A few things to think about before you invest
Factor funds are high-risk investments that should be used only by investors who:
Fully understand the risks and potential benefits of each factor.
Can financially and emotionally handle higher degrees of risk.
Consider these funds to be long-term investments.
Factor returns can be cyclical, so you could experience sharp and lengthy periods of underperformance compared with the broader stock market.
If you have questions about whether factor funds might help meet your investment goals, we strongly recommend that you consult with a qualified investment advisor.

Those 2 are bad enough. What will be considered lengthy underperformance(years). I am out since I don't understand.
That's it, pure and simple. Those characteristics are "in the market" and factor investing entails selecting or weighting stocks that "load" on each factor; or in the case of long-short strategy certain stocks are weighted positively and others weighted negatively.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by indexonlyplease » Sat Jul 07, 2018 8:55 am

I am only asking because I don't understand why I would invest this way.

While I only understand very little about factor investing, I ask the question, is it just a new way to open new funds. Or new marketing.

3 years ago before I found this site and decided on the 3 fund. I simply invested in my taxed deferred at work. I put equal amounts into large, mid, small and international. This was over 20 years ago. All managed funds with high ers. Only funds offerd at the time. Never owned bonds. Never rebalanced.

So, when I move the money over 3 fund (was able becasuse of fund changes in account) I guess I bought into the total market idea. Learned about fixed income and rebalancing.

So, now 3 years later should I consider changing my way of investing again? And how do I decide what would be better for me?

I was happy with the previous 20 years, never changing funds just biweekly equal contributions. But my change was because I now understood the reason to own fixed income in retirement and index funds.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by vineviz » Sat Jul 07, 2018 10:20 am

indexonlyplease wrote:
Sat Jul 07, 2018 8:55 am
I am only asking because I don't understand why I would invest this way.

While I only understand very little about factor investing, I ask the question, is it just a new way to open new funds. Or new marketing.
Let me say that I’m not sure that you should invest this way.

Although factor based investing isn’t conceptually difficult, IMHO, it is more complicated to understand than a market cap weighted 3 or 4 fund index strategy. And given how well the simple 3 fund portfolio approach works, and how new some of the multi factor funds are, it is quite possible that your current strategy is perfect for you.

I’d say a factor based approach to portfolio construction is for the investor who is willing to take on more complexity in exchange for slightly better returns and/or slightly lower risk.

Lowering costs and using index funds virtually guaranteed an improvement over your prior strategy and investment options. The case for using factor funds isn’t quite as obvious.

It makes sense to me, but I have an MBA with a concentration in finance and worked as professional investor. I’m not saying you need that same background to use factors, but I would never recommend anyone rush into ANY investment they don’t fully understand.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by indexonlyplease » Sat Jul 07, 2018 11:27 am

vineviz wrote:
Sat Jul 07, 2018 10:20 am
indexonlyplease wrote:
Sat Jul 07, 2018 8:55 am
I am only asking because I don't understand why I would invest this way.

While I only understand very little about factor investing, I ask the question, is it just a new way to open new funds. Or new marketing.
Let me say that I’m not sure that you should invest this way.

Although factor based investing isn’t conceptually difficult, IMHO, it is more complicated to understand than a market cap weighted 3 or 4 fund index strategy. And given how well the simple 3 fund portfolio approach works, and how new some of the multi factor funds are, it is quite possible that your current strategy is perfect for you.

I’d say a factor based approach to portfolio construction is for the investor who is willing to take on more complexity in exchange for slightly better returns and/or slightly lower risk.

Lowering costs and using index funds virtually guaranteed an improvement over your prior strategy and investment options. The case for using factor funds isn’t quite as obvious.

It makes sense to me, but I have an MBA with a concentration in finance and worked as professional investor. I’m not saying you need that same background to use factors, but I would never recommend anyone rush into ANY investment they don’t fully understand.
great response. With your background I understand your thinking now. Way above mine but I will continue to learn.

Thank You,

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by jalbert » Sun Jul 08, 2018 12:34 am

Telling a retiree "you might need to wait a few days to make that $10,000 sell to fund the next few months of expenses unless you're willing to lose $22 due to the premium over NAV" doesn't sound like something I'd lose sleep over. But I guess reasonable people can agree to disagree on that.
There is also a bid-ask spread and I have seen premium to NAV be as high as 50 bp. Between that and the higher ER, not sure I would bother. I'm also fairly skeptical of momentum factors.
Index fund investor since 1987.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by Dead Man Walking » Sun Jul 08, 2018 8:46 pm

My understanding of factor-based investing is that it is a strategy for lowering risk with the possibility of increasing returns. Many investors may be interested in risk adjusted returns. The problem with most multifactor funds is that they have a brief history. Many investors have a "don't tell me, show me" attitude that isn't compatible with brief history. For goodness sake don't give me the size and value examples again. Of course, if someone wants to give examples of active funds that have utilized a momentum strategy, please do so.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by Theoretical » Sun Jul 08, 2018 9:10 pm

Thus far, the only ETFs that have major loads going on are a small cap ETF that's likely to close (DESC with 11 MM in assets) and the Vanguard funds. The iShares multifactor large cap products are such nominal tilts that you're getting minor tracking error (positive or negative), but they're better than the SPDR ones. The small cap ones, ISCF and SMLF aren't bad per se, though they lean closer to growth than value with momentum.

The Vanguard funds on the other hand have only early findings, but they've got some really deep value tilts on the value, liquidity, and even the multifactor one in particular. Daily regression for 3 months of data isn't great, but it's something and they've been consistent.

There are some extremely consistent quant mutual funds that have consistent deep factor exposure, but the Expense Ratios are decidedly unbogleheadish, save for the Vanguard funds.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by jhfenton » Mon Jul 09, 2018 7:59 am

Theoretical wrote:
Sun Jul 08, 2018 9:10 pm
Thus far, the only ETFs that have major loads going on are a small cap ETF that's likely to close (DESC with 11 MM in assets) and the Vanguard funds. The iShares multifactor large cap products are such nominal tilts that you're getting minor tracking error (positive or negative), but they're better than the SPDR ones. The small cap ones, ISCF and SMLF aren't bad per se, though they lean closer to growth than value with momentum.

The Vanguard funds on the other hand have only early findings, but they've got some really deep value tilts on the value, liquidity, and even the multifactor one in particular. Daily regression for 3 months of data isn't great, but it's something and they've been consistent.

There are some extremely consistent quant mutual funds that have consistent deep factor exposure, but the Expense Ratios are decidedly unbogleheadish, save for the Vanguard funds.
+1 This is my take as well. Most of the existing multifactor ETFs in the market are weak sauce, designed more for minimal tracking error than for deep factor exposure. That is not necessarily a bad thing--that's essentially what Vanguard US Value (VUVLX) has been since the Quantitative Equity Group took over full management in 2010, and it's been an OK fund. But it's not what I'm looking for.

I do own EMGF (iShares Edge MSCI Multifactor Emerging Markets) in my HSA. I don't put any stock in the factor regression data for emerging markets, but, eye-balling the portfolio statistics, its holdings seems both cheaper (lower P/E, P/B, P/S) and growthier (higher earnings growth) than a vanilla fund like VEMAX. (I wish it were a bit cheaper than its 45 bp.)

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by nisiprius » Mon Jul 09, 2018 8:39 am

indexonlyplease wrote:
Sat Jul 07, 2018 8:55 am
...While I only understand very little about factor investing, I ask the question, is it just a new way to open new funds. Or new marketing.... So, now 3 years later should I consider changing my way of investing again? And how do I decide what would be better for me?
Factor investing is fine-tuning. Factor advocates believe that this form of investing gives them a statistical edge and that if a factor-based portfolio is committed to firmly and faithfully over long periods of time (decades), the portfolio will alternatively underperform and outperform a total-market portfolio--but that over time, the cumulative effect of this statistical edge will eventually make itself known in the form of meaningfully higher return for the same risk. A factor advocate, Jared Kizer, has written:
Any transparent strategy, which applies to [the factor strategies] outlined in this piece, is capable of extended periods of underperformance. There is nothing that preordains these strategies to work over any period of any length. Investors should either commit to these strategies over an extremely long time horizon or not tilt toward these factors at all.
So one suggestion is that unless you have a high enough degree of personal conviction that you are seriously prepared to hold to a factor portfolio, even if it underperforms for ten years, you are not ready for factor investing.

I personally am not ready for factor investing. I don't have anything approaching that degree of conviction. The best I can summon is "there might be something in it."
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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by vineviz » Mon Jul 09, 2018 1:09 pm

jhfenton wrote:
Mon Jul 09, 2018 7:59 am
+1 This is my take as well. Most of the existing multifactor ETFs in the market are weak sauce, designed more for minimal tracking error than for deep factor exposure. That is not necessarily a bad thing--that's essentially what Vanguard US Value (VUVLX) has been since the Quantitative Equity Group took over full management in 2010, and it's been an OK fund. But it's not what I'm looking for.
I could be wrong, but I think you'd have trouble building a factor-based portfolio that even remotely resembled a "traditional" equity portfolio with better factor loadings than the multifactor ETFs I listed earlier. At the very least, those ETFs all havefactor loadings roughly similar or greater to DFA's "core" funds.

Perhaps I'm missing the point, but multifactor funds and single factor funds seem like completely different tools designed for different jobs.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by jhfenton » Mon Jul 09, 2018 2:07 pm

vineviz wrote:
Mon Jul 09, 2018 1:09 pm
I could be wrong, but I think you'd have trouble building a factor-based portfolio that even remotely resembled a "traditional" equity portfolio with better factor loadings than the multifactor ETFs I listed earlier. At the very least, those ETFs all have factor loadings roughly similar or greater to DFA's "core" funds.
When I run ROUS, LRGF, JPUS, and DEUS on portfoliovisualizer.com (four-factor, daily, either AQR or Fama-French), I see virtually no factor loadings for any of them for anything. (Doing monthly or five-factor with Fama-French doesn't change anything.)

VFMF has a very small sample size, but it has significant loadings on SMB, HML, and MOM (modest MOM using Fama-French, higher using AQR data).
vineviz wrote:
Mon Jul 09, 2018 1:09 pm
Perhaps I'm missing the point, but multifactor funds and single factor funds seem like completely different tools designed for different jobs.
I agree that they are somewhat different tools. That's why I am using both VFMFX (Multifactor) and VFVA (Value). But I don't see the point in a multifactor fund if you end up with essentially no factor loadings.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by maximuum » Mon Jul 09, 2018 2:25 pm

I am also still waiting on an international multi-factor fund with decent loading for a taxable account. Vanguard international small (VSS) has no value loads and is very tax inefficient. Schwab fundamental international small (FNDC) also has essentially no value load. The ishares international small multi-factor (ISCF) only has $43 million of AUM....

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by vineviz » Mon Jul 09, 2018 2:34 pm

jhfenton wrote:
Mon Jul 09, 2018 2:07 pm
When I run ROUS, LRGF, JPUS, and DEUS on portfoliovisualizer.com (four-factor, daily, either AQR or Fama-French), I see virtually no factor loadings for any of them for anything. (Doing monthly or five-factor with Fama-French doesn't change anything.)

VFMF has a very small sample size, but it has significant loadings on SMB, HML, and MOM (modest MOM using Fama-French, higher using AQR data).
If you run those four on PV with the same dates as VFMF I think you'll find ROUS, LRGF, JPUS, and DEUS aren't quite as weak relative to either VFMF or to DFA Core Equity.

https://www.portfoliovisualizer.com/fac ... ssion=true

They all have lower size loading, but decent loading on other factors (HML and QMJ particularly). And ROUS seems to be targeting factors that aren't in PV (or at least are defined somewhat differently), since its r-squared is low and its alpha is high.

The main comparison I was making, I guess, was with what DFA calls a "core fund" since that seems to be the target that Hartford, Blackrock, etc. were aiming for.

Still, I think my conclusion matches yours in that VFMF appears (so far) to be the best of the bunch.

And while definitely agree that there are factor funds which have heavier loadings on one or two factors, I'm not very confident that they can easily be assembled into a PORTFOLIO which both resembles a traditional "core" equity portfolio and also ends up with significantly stronger net factor loadings than these multifactor funds have. I'd be happy to be persuaded though.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by vineviz » Mon Jul 09, 2018 2:36 pm

maximuum wrote:
Mon Jul 09, 2018 2:25 pm
The ishares international small multi-factor (ISCF) only has $43 million of AUM....
I guess I'm lucky that my international allocation is considerably less that $43 million: I've never had any trouble buying ISCF through my broker.

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by jhfenton » Mon Jul 09, 2018 3:00 pm

vineviz wrote:
Mon Jul 09, 2018 2:34 pm
If you run those four on PV with the same dates as VFMF I think you'll find ROUS, LRGF, JPUS, and DEUS aren't quite as weak relative to either VFMF or to DFA Core Equity.

They all have lower size loading, but decent loading on other factors (HML and QMJ particularly). And ROUS seems to be targeting factors that aren't in PV (or at least are defined somewhat differently), since its r-squared is low and its alpha is high.

The main comparison I was making, I guess, was with what DFA calls a "core fund" since that seems to be the target that Hartford, Blackrock, etc. were aiming for.

Still, I think my conclusion matches yours in that VFMF appears (so far) to be the best of the bunch.
Good point on the dates. The conclusion may be that VFMF isn't as factor-heavy as it appears at present. :beer

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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by jalbert » Mon Jul 09, 2018 3:15 pm

My understanding of factor-based investing is that it is a strategy for lowering risk with the possibility of increasing returns.
It might lower risk. Nobody can claim that as fully established. Any strategy to boost returns above the risk-free rate only has the possibility of increasing returns. If the higher return were guaranteed, the higher return would become the risk-free rate.
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Re: Morningstar: What to Consider When Picking Multifactor ETFs

Post by pyld76 » Wed Jul 11, 2018 11:55 am

indexonlyplease wrote:
Sat Jul 07, 2018 8:55 am


I was happy with the previous 20 years, never changing funds just biweekly equal contributions. But my change was because I now understood the reason to own fixed income in retirement and index funds.
Don't change a thing.

A three fund (or, in tax sheltered, the target date and/or lifestrategy) portfolio which you DCA into over an investment lifetime is going to leave you better off than probably 90% of the investing population--and with more time on your hands to do useful things and more hair, etc.

Factor investing is "The last %10." You have to be willing to tolerate long periods of underperformance. The funds to implement are usually harder to find (particularly in workplace retirement plans). There's a deeper understanding necessary. If you can live with all that, there might be (is) a premium on the table which is "free."

I happen to think my own ability to overthink things is likely going to destroy more value than I gain, so I don't stray far from a market weight portfolio.

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