Best Multifactor Funds to use for Tilting/Replacement?

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AndroAsc
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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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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.

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

Post by Saganesque » Sat Dec 01, 2018 7:42 pm

AndroAsc wrote:
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?
Did you ever get a good answer to how heavy on the factors these funds are? I'm looking too.

I also went with BlackRock for a factor-based portfolio. I'm at about 60 bonds/20 SMLF/15 ISCF/5 EMGF. But I'm a bit uneasy about not finding any sufficient information about how much factor exposure you get. Also, I'm unsure what benefit LRGF provides if you you already have SMLF. That is, I genuinely don't know. Why did you choose to include it? I'll probably move to 50/50 with some good alternative funds in reinsurance, risk-variance, p2p loans, etc, if I can find decent ones outside those offered by Stoneridge. I don't think I have access to them through Fidelity.

gtwhitegold
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Joined: Fri Sep 21, 2012 1:55 pm

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

Post by gtwhitegold » Sun Dec 02, 2018 11:51 am

I'm personally using QEELX and SFENX/FNDE for EM large caps; FEMS and DGS for EM small caps. My wife is using DFSTX in her 401k for US small caps. We currently don't have any quantitative funds in developed international since we are prioritizing tax advantaged space, so I'm just using the TSP I Fund for that, but will likely change it a bit once the I Fund changes to the ACWI ex US IMI index.

The Hartford multi-factor ETFs, iShares multi-factor ETFs, USAA Value Momentum Blend ETFs, and Franklin Templeton multi-factor ETFs all look compelling.

Wisdomtree's and First Trust's multi-factor international funds can use hedging, so I'm not compelled to use them. PIMCO's use a blend, so the factor loads will be smaller.

stan1
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Re: Best Multifactor Funds to use for Tilting/Replacement?

Post by stan1 » Sun Dec 02, 2018 12:10 pm

gtwhitegold wrote:
Sun Dec 02, 2018 11:51 am

The Hartford multi-factor ETFs, iShares multi-factor ETFs, USAA Value Momentum Blend ETFs, and Franklin Templeton multi-factor ETFs all look compelling.
Don't forget the John Hancock multi-factor ETFs. They are managed by some yahoos going by the name Dimensional Fund Advisors. Are they worth 30-50 basis points over Vanguard and iShares? Don't know yet.

gtwhitegold
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Joined: Fri Sep 21, 2012 1:55 pm

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

Post by gtwhitegold » Sun Dec 02, 2018 12:36 pm

True, my only complaint is that they don't target momentum. If I remember correctly, they have a screen for negative momentum like the DFA mutual funds, but I could be mistaken.
stan1 wrote:
Sun Dec 02, 2018 12:10 pm
gtwhitegold wrote:
Sun Dec 02, 2018 11:51 am

The Hartford multi-factor ETFs, iShares multi-factor ETFs, USAA Value Momentum Blend ETFs, and Franklin Templeton multi-factor ETFs all look compelling.
Don't forget the John Hancock multi-factor ETFs. They are managed by some yahoos going by the name Dimensional Fund Advisors. Are they worth 30-50 basis points over Vanguard and iShares? Don't know yet.

Theoretical
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Joined: Tue Aug 19, 2014 10:09 pm

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

Post by Theoretical » Sun Dec 02, 2018 1:49 pm

stan1 wrote:
Sun Dec 02, 2018 12:10 pm
gtwhitegold wrote:
Sun Dec 02, 2018 11:51 am

The Hartford multi-factor ETFs, iShares multi-factor ETFs, USAA Value Momentum Blend ETFs, and Franklin Templeton multi-factor ETFs all look compelling.
Don't forget the John Hancock multi-factor ETFs. They are managed by some yahoos going by the name Dimensional Fund Advisors. Are they worth 30-50 basis points over Vanguard and iShares? Don't know yet.
Look at the factor results. They're expensive and terrible for the factor loads and the negative alphas:https://bit.ly/2AIoINH.

The USAA and iShares ones are interesting, Hartford has some unique exposure (especially the EM fund - which has a lot more country diversification than normal).

The Vanguard funds look to be settling down into an extremely factor pure exposure. (It's still early data, but the daily regressions also look pretty sound: https://bit.ly/2RuvI8e)

gtwhitegold
Posts: 262
Joined: Fri Sep 21, 2012 1:55 pm

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

Post by gtwhitegold » Sun Dec 02, 2018 2:09 pm

I agree. Switching to the AQR factors make the large cap and mid cap funds look worse, but the small cap fund looks better.
Theoretical wrote:
Sun Dec 02, 2018 1:49 pm
stan1 wrote:
Sun Dec 02, 2018 12:10 pm
gtwhitegold wrote:
Sun Dec 02, 2018 11:51 am

The Hartford multi-factor ETFs, iShares multi-factor ETFs, USAA Value Momentum Blend ETFs, and Franklin Templeton multi-factor ETFs all look compelling.
Don't forget the John Hancock multi-factor ETFs. They are managed by some yahoos going by the name Dimensional Fund Advisors. Are they worth 30-50 basis points over Vanguard and iShares? Don't know yet.
Look at the factor results. They're expensive and terrible for the factor loads and the negative alphas:https://bit.ly/2AIoINH.

The USAA and iShares ones are interesting, Hartford has some unique exposure (especially the EM fund - which has a lot more country diversification than normal).

The Vanguard funds look to be settling down into an extremely factor pure exposure. (It's still early data, but the daily regressions also look pretty sound: https://bit.ly/2RuvI8e)

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