Five Factor Investing with ETFs

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Francis42
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Five Factor Investing with ETFs

Post by Francis42 »

Hiyo,

I’m a big fan of Ben felix’s common sense investing and got indoctrinated into factor models in B-school. I’ve been building my own portfolio with factor tilts (size, value, profitability) and this paper was recently published by Ben. Pretty close to my target AA, but it’s given me a bit to chew on in terms of constructive changes. It’s using Canadian funds in its model portfolio and I’ve tried to construct it from a US fund perspective.

Paper: https://www.pwlcapital.com/wp-content/u ... h-ETFs.pdf

Model portfolio:
Vti - 60%
AVUV - 10%
Vxus - 16%
Avdv - 6%
Vwo -8%

Curious to get people’s thoughts...

Do you factor tilt your portfolio? Why or why not? What factors would you choose?

What do folks think of the AA of the above model portfolio?

Any perspectives of Avantis funds? I’m excited that a DFA-like product is hitting the market and becoming more accessible.

Looking forward to hearing thoughts. Huge plug for Ben’s work - his content is top notch.
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David Jay
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Re: Five Factor Investing with ETFs

Post by David Jay »

Five-factor investing was “the latest thing” starting about 10 years ago. A number of 5-factor funds and ETFs opened between 2014 and 2018.

Performance has been disappointing. Last week a question prompted me to go look at the performance. I looked at 3, including the Vanguard fund and the largest (by assets) fund, all 3 had dramatically underperformed the SP500 over the life of the fund.

These days one will find few references to Five Factor investing in the financial industry, the industry has moved on to newer fads.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
typical.investor
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Re: Five Factor Investing with ETFs

Post by typical.investor »

Francis42 wrote: Sun Apr 04, 2021 7:36 am
Curious to get people’s thoughts...

Do you factor tilt your portfolio? Why or why not? What factors would you choose?

What do folks think of the AA of the above model portfolio?
Great question. I think your target portfolio is great. Everyone will quibble about what they think the ideal portfolio is but nobody really knows.

Anyway ...

For stocks, I'm currently 48% value type funds (including developed markets and emerging), 6% multi factor funds(dev int and em) and the rest in market cap weighting. My international value allocation is heavier than my US, and international overall is about 40% of stocks.

Funny thing though, when factor advocates insist you must have factor funds to be properly diversified, I argue back that no you don't factors are increased risk because truly you are omitting or reducing many fine companies from your holdings and there is no guarantee that the characteristics you are selecting for will outperform in your holding period.

Anyway, I like Ben Felix's work too. It clearly identifies momentum as an anomaly and not a risk factor. I see that as important as we know factors have momentum (and the multi factor funds I use try to account for that). So any given factor returns in any period are likely a bit anomalous. I think that's the case with low value where it became popular and expensive. I mean who cares the reason for good returns (see large cap growth and tech stocks for instance). Still, momentum is a bit tricky I think. I am not sure how advantus funds are really going to work out in that regard. I didn't expect iShares Momentum to do as well as it has and though AQR would have been better. Didn't turn out that way.

So it's complicated. I don't worry about recent value underperformance (meaning last decade) as I think it'll be a good hedge if inflation takes off. I did get impatient with returns and allocated some total market to leveraged total market though. Was happy after rebalancing when stocks stocks dropped then rebounded after 3.2020.

But if you are going to sell out in disappointment in a few years if it doesn't go your way, they I would suggest not doing it. There will be a lot of "sunk cost fallacy" type posts and people arguing "if you wouldn't buy it today, then don't hold it".
YRT70
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Re: Five Factor Investing with ETFs

Post by YRT70 »

Francis42 wrote: Sun Apr 04, 2021 7:36 am Hiyo,

I’m a big fan of Ben felix’s common sense investing and got indoctrinated into factor models in B-school. I’ve been building my own portfolio with factor tilts (size, value, profitability) and this paper was recently published by Ben. Pretty close to my target AA, but it’s given me a bit to chew on in terms of constructive changes. It’s using Canadian funds in its model portfolio and I’ve tried to construct it from a US fund perspective.

Paper: https://www.pwlcapital.com/wp-content/u ... h-ETFs.pdf

Model portfolio:
Vti - 60%
AVUV - 10%
Vxus - 16%
Avdv - 6%
Vwo -8%

Curious to get people’s thoughts...

Do you factor tilt your portfolio? Why or why not? What factors would you choose?

What do folks think of the AA of the above model portfolio?
I've been following Ben Felix for a while. I think he brings out great material. I like the model portfolio. I use virtually the same funds but I choose for a stronger SCV tilt.

The one thing I always wonder about is whether adding momentum to it would improve it. Some people choose to add separate momentum funds (e.g. QMOM), some people choose multi factor funds that target momentum too (e.g. VFMF, SMLF).

If you like to see more discussion about factors there's a dedicated small cap value thread: viewtopic.php?f=10&t=282533

The Rational Reminder forum is also good: https://community.rationalreminder.ca/
gonefishing01
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Re: Five Factor Investing with ETFs

Post by gonefishing01 »

Also a fan of Ben Felix, but full Five Factor seems needlessly complex for me personally. I’m in VTI/VEA/VWO (opposed to VTI/VXUS) and have been contemplating adding AVDV to my international mix with new contributions for a while. VTI is perfection in my opinion for US, but I’m less satisfied with the total international/emerging indexes.

Like the cleanliness of this and backtesting is splitting hairs vs 70/30 VTI/VXUS, but may be well positioned going forward:

70% VTI
10% VEA
10% VWO
10% AVDV

If I’m honest, I’m sorry i don’t just have VTI/VXUS. Big gains in VEA/VWO from buying last year in March/April are preventing me from switching anytime soon. Every time I need to rebalance them I start to overthink the split and have to remind myself that tinkering with this stuff can be hazardous to my wealth.
Random Walker
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Re: Five Factor Investing with ETFs

Post by Random Walker »

I’m hugely tilted to factors, but I do it way more for improved portfolio efficiency than I do for increased returns. I’ve tried to diversify across as many independent and unique sources of return as possible. Because of the heavy tilt to equities with higher expected return, I have concomitantly decreased my overall equity allocation, increased exposure to safe bonds and the term factor.

Dave
YRT70
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Re: Five Factor Investing with ETFs

Post by YRT70 »

David Jay wrote: Sun Apr 04, 2021 8:10 am Five-factor investing was “the latest thing” starting about 10 years ago. A number of 5-factor funds and ETFs opened between 2014 and 2018.

Performance has been disappointing. Last week a question prompted me to go look at the performance. I looked at 3, including the Vanguard fund and the largest (by assets) fund, all 3 had dramatically underperformed the SP500 over the life of the fund.

These days one will find few references to Five Factor investing in the financial industry, the industry has moved on to newer fads.
You're right that the last years have been disappointing for most multifactor funds. But there are much older multifactors funds that have performed well. For example Dimensional small value funds DFSVX and DISVX have returned more than total market funds since inception. DFSVX since 1993, DISVX since 1997.

DFSVX vs. VTSMX https://www.portfoliovisualizer.com/bac ... ion2_2=100

DISVX vs. VGTSX https://www.portfoliovisualizer.com/bac ... ion2_2=100
Random Walker
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Re: Five Factor Investing with ETFs

Post by Random Walker »

David Jay wrote: Sun Apr 04, 2021 8:10 am Five-factor investing was “the latest thing” starting about 10 years ago. A number of 5-factor funds and ETFs opened between 2014 and 2018.

Performance has been disappointing. Last week a question prompted me to go look at the performance. I looked at 3, including the Vanguard fund and the largest (by assets) fund, all 3 had dramatically underperformed the SP500 over the life of the fund.

These days one will find few references to Five Factor investing in the financial industry, the industry has moved on to newer fads.
What are those fads? To me, there is only so much room for additional explanatory power for the returns of a portfolio. CAPM got us about 60-70%, adding size and value got us to about 90%. Now adding momentum and profitability/quality/investment we can explain about 95% of the variability in portfolio returns. There isn’t a lot more room to go, and I don’t think necessary either. New factors may subsume older ones, but that doesn’t invalidate the utility of the older ones. I’m sure multifactor portfolios will be improved upon in the future. But these I think will be evolutionary changes, not revolutionary.

The last ten years has been dominated by large growth, and most of the dominance has been fueled by changes in valuation, P/E multiple expansion. To say the least, the next decade will be intriguing!

Dave
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Re: Five Factor Investing with ETFs

Post by Anon9001 »

Francis42 wrote: Sun Apr 04, 2021 7:36 am Model portfolio:
Vti - 60%
AVUV - 10%
Vxus - 16%
Avdv - 6%
Vwo -8%
Less than 20% allocation to anything other than Bitcoin/Cryptos will not make a difference to portfolio. Would simplify to 50% VT 25% AVDV 25% AVUV.
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drumboy256
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Re: Five Factor Investing with ETFs

Post by drumboy256 »

I realized recently that I'm a Boglehead that factor invests. Is that a bad thing? No, is it like being the scarlet witch? On these forums? Probably.

I'm running a soccer formation on my funds now and I haven't been disappointed: (4-3-2-1)
40 FXAIX/VOO
30 FSMAX/VXF
20 VXUS
10 FNBGX

I'm currently in the process of adding FISVX (Small cap value) to the mix in capturing the total market. Yes, I could go FSKAX (don't like the index tracker compared to VTI) yes, I could simplify by going target date fund in my 401k but this suits me for staying involved without tinkering. My IPS has me re-balancing in June / December so it will be interesting to see what the rest of this year brings.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson
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Re: Five Factor Investing with ETFs

Post by Anon9001 »

YRT70 wrote: Sun Apr 04, 2021 9:57 am You're right that the last years have been disappointing for most multifactor funds. But there are much older multifactors funds that have performed well. For example Dimensional small value funds DFSVX and DISVX have returned more than total market funds since inception. DFSVX since 1993, DISVX since 1997.
The correct comparison is to SCG to see if the SCV premium is positive and there is advantage to owning SCV over owning plain small-cap fund. MSCI Indexes show Ex-USA SCV wins tremendously and in USA SCG wins. Although I haven't done any tests for statistical significance of US SCG alpha over SCV but this paper below has done that for 1992-2019 and SCG premium is not statically significant so I would not load up on US SCG. Screenshot for the paper is taken from Uncorrelated post.
Image
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YRT70
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Re: Five Factor Investing with ETFs

Post by YRT70 »

Anon9001 wrote: Sun Apr 04, 2021 10:13 am
YRT70 wrote: Sun Apr 04, 2021 9:57 am You're right that the last years have been disappointing for most multifactor funds. But there are much older multifactors funds that have performed well. For example Dimensional small value funds DFSVX and DISVX have returned more than total market funds since inception. DFSVX since 1993, DISVX since 1997.
The correct comparison is to SCG to see if the SCV premium is positive...
Well that's one way to compare but if you check the post I responded to by David Jay you'll see that he compared multi factor funds to S&P 500.

PS. I far prefer using real life funds for comparison instead of MSCI Index data.
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nedsaid
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Re: Five Factor Investing with ETFs

Post by nedsaid »

I have chosen to tilt primarily with Size and Value. It is interesting that Small Cap Value has done well in 2021. The iShares S&P Small Cap Value 600 Index ETF (IJS) is up 25.70% year to date, the Vanguard Small Cap Value Index ETF (VBR) is up 18.33%. In contrast, the US Total Stock Market Index is up 7.81%. Just as the death of Size and Value was announced and the whole ideas of factors ridiculed, we are seeing the resurgence of Small Value.
A fool and his money are good for business.
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Francis42
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Re: Five Factor Investing with ETFs

Post by Francis42 »

David Jay wrote: Sun Apr 04, 2021 8:10 am Five-factor investing was “the latest thing” starting about 10 years ago. A number of 5-factor funds and ETFs opened between 2014 and 2018.

Performance has been disappointing. Last week a question prompted me to go look at the performance. I looked at 3, including the Vanguard fund and the largest (by assets) fund, all 3 had dramatically underperformed the SP500 over the life of the fund.

These days one will find few references to Five Factor investing in the financial industry, the industry has moved on to newer fads.
Totally agree that there are a lot of junk financial products out there trying to command a higher management fee for unique services.

That said, I differentiate between those products (and accompanying misalignment of incentives in the financial industry) from the empirical evidence of factors and associated risk premiums. After all, all bogleheads are factor investors - the market risk premium identified in the CAPM and captured by VTI and VXUS is the OG-granddaddy factor of them all.
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Francis42
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Re: Five Factor Investing with ETFs

Post by Francis42 »

YRT70 wrote: Sun Apr 04, 2021 8:22 am
Francis42 wrote: Sun Apr 04, 2021 7:36 am Hiyo,

I’m a big fan of Ben felix’s common sense investing and got indoctrinated into factor models in B-school. I’ve been building my own portfolio with factor tilts (size, value, profitability) and this paper was recently published by Ben. Pretty close to my target AA, but it’s given me a bit to chew on in terms of constructive changes. It’s using Canadian funds in its model portfolio and I’ve tried to construct it from a US fund perspective.

Paper: https://www.pwlcapital.com/wp-content/u ... h-ETFs.pdf

Model portfolio:
Vti - 60%
AVUV - 10%
Vxus - 16%
Avdv - 6%
Vwo -8%

Curious to get people’s thoughts...

Do you factor tilt your portfolio? Why or why not? What factors would you choose?

What do folks think of the AA of the above model portfolio?
I've been following Ben Felix for a while. I think he brings out great material. I like the model portfolio. I use virtually the same funds but I choose for a stronger SCV tilt.

The one thing I always wonder about is whether adding momentum to it would improve it. Some people choose to add separate momentum funds (e.g. QMOM), some people choose multi factor funds that target momentum too (e.g. VFMF, SMLF).

If you like to see more discussion about factors there's a dedicated small cap value thread: viewtopic.php?f=10&t=282533

The Rational Reminder forum is also good: https://community.rationalreminder.ca/
I'm hesitant to pursue momentum because of transaction costs. I'm looking to blend size, value, and profitability.

Mind if I ask your allocation to SCV?
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Francis42
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Re: Five Factor Investing with ETFs

Post by Francis42 »

Random Walker wrote: Sun Apr 04, 2021 9:59 am
David Jay wrote: Sun Apr 04, 2021 8:10 am Five-factor investing was “the latest thing” starting about 10 years ago. A number of 5-factor funds and ETFs opened between 2014 and 2018.

Performance has been disappointing. Last week a question prompted me to go look at the performance. I looked at 3, including the Vanguard fund and the largest (by assets) fund, all 3 had dramatically underperformed the SP500 over the life of the fund.

These days one will find few references to Five Factor investing in the financial industry, the industry has moved on to newer fads.
What are those fads? To me, there is only so much room for additional explanatory power for the returns of a portfolio. CAPM got us about 60-70%, adding size and value got us to about 90%. Now adding momentum and profitability/quality/investment we can explain about 95% of the variability in portfolio returns. There isn’t a lot more room to go, and I don’t think necessary either. New factors may subsume older ones, but that doesn’t invalidate the utility of the older ones. I’m sure multifactor portfolios will be improved upon in the future. But these I think will be evolutionary changes, not revolutionary.

The last ten years has been dominated by large growth, and most of the dominance has been fueled by changes in valuation, P/E multiple expansion. To say the least, the next decade will be intriguing!

Dave
Ken French was on the rational reminder podcast a few months ago. He made a really good point that total return is both the expected return and unexpected return. His main point was that the driver for growth stocks were from unexpected returns.
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Re: Five Factor Investing with ETFs

Post by garlandwhizzer »

Ken French was on the rational reminder podcast a few months ago. He made a really good point that total return is both the expected return and unexpected return. His main point was that the driver for growth stocks were from unexpected returns.
What a surprise! The unexpected happened.

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Re: Five Factor Investing with ETFs

Post by grabiner »

I don't think the amount of tilt you have will make much difference.

I care more about the value and size factors, but I have a stronger overweight than you do, even with similar funds. For years, I have held 25% growth and 75% value, which means equal amounts in value and blend funds. I use AVDV for international small-cap value, IVLU (iShares MSCI EAFE Factor Value ETF) for international large-cap value, and VFVA (Vanguard Factor Value ETF) for US large-cap and small-cap value.

I don't have a value fund in emerging markets because there isn't anything that is both low-cost and gives enough factor exposure. I don't think Avantis' AVEM is worth it.

And my usual recommendation: I never recommend anyone match my portfolio (which is 86% stock with close to the risk of 100% stock because of my overweights of riskier stock). If a portfolio like mine is right for you, then you know enough to ignore that advice.
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Re: Five Factor Investing with ETFs

Post by Random Walker »

Francis42 wrote: Sun Apr 04, 2021 12:54 pm
Random Walker wrote: Sun Apr 04, 2021 9:59 am
David Jay wrote: Sun Apr 04, 2021 8:10 am Five-factor investing was “the latest thing” starting about 10 years ago. A number of 5-factor funds and ETFs opened between 2014 and 2018.

Performance has been disappointing. Last week a question prompted me to go look at the performance. I looked at 3, including the Vanguard fund and the largest (by assets) fund, all 3 had dramatically underperformed the SP500 over the life of the fund.

These days one will find few references to Five Factor investing in the financial industry, the industry has moved on to newer fads.
What are those fads? To me, there is only so much room for additional explanatory power for the returns of a portfolio. CAPM got us about 60-70%, adding size and value got us to about 90%. Now adding momentum and profitability/quality/investment we can explain about 95% of the variability in portfolio returns. There isn’t a lot more room to go, and I don’t think necessary either. New factors may subsume older ones, but that doesn’t invalidate the utility of the older ones. I’m sure multifactor portfolios will be improved upon in the future. But these I think will be evolutionary changes, not revolutionary.

The last ten years has been dominated by large growth, and most of the dominance has been fueled by changes in valuation, P/E multiple expansion. To say the least, the next decade will be intriguing!

Dave
Ken French was on the rational reminder podcast a few months ago. He made a really good point that total return is both the expected return and unexpected return. His main point was that the driver for growth stocks were from unexpected returns.
That unexpected extra return to growth I believe has been due to multiple expansion. I think, looking forward, that is a positive sign for the value crowd.

Dave
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Re: Five Factor Investing with ETFs

Post by luckyducky99 »

grabiner wrote: Sun Apr 04, 2021 1:19 pm ... my portfolio (which is 86% stock with close to the risk of 100% stock because of my overweights of riskier stock).
I kind of like this idea: to look at a portfolio in terms of how risky it is relative to 100% TSM, or 60/40, or whatever. But how do you do that? Put it in portfolio visualizer and compare stddev? Some other way?
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Re: Five Factor Investing with ETFs

Post by Random Walker »

luckyducky99 wrote: Sun Apr 04, 2021 3:50 pm
grabiner wrote: Sun Apr 04, 2021 1:19 pm ... my portfolio (which is 86% stock with close to the risk of 100% stock because of my overweights of riskier stock).
I kind of like this idea: to look at a portfolio in terms of how risky it is relative to 100% TSM, or 60/40, or whatever. But how do you do that? Put it in portfolio visualizer and compare stddev? Some other way?
Need to make assumptions about the expected return and standard deviation of various asset classes. Expected portfolio return is the weighted average of component expected returns. Expected volatility of portfolio is less than mean weighted expected SD because of correlations between components less than one.

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Re: Five Factor Investing with ETFs

Post by Morse Code »

grabiner wrote: Sun Apr 04, 2021 1:19 pm I don't think the amount of tilt you have will make much difference.

I care more about the value and size factors, but I have a stronger overweight than you do, even with similar funds. For years, I have held 25% growth and 75% value, which means equal amounts in value and blend funds. I use AVDV for international small-cap value, IVLU (iShares MSCI EAFE Factor Value ETF) for international large-cap value, and VFVA (Vanguard Factor Value ETF) for US large-cap and small-cap value.

I don't have a value fund in emerging markets because there isn't anything that is both low-cost and gives enough factor exposure. I don't think Avantis' AVEM is worth it.

And my usual recommendation: I never recommend anyone match my portfolio (which is 86% stock with close to the risk of 100% stock because of my overweights of riskier stock). If a portfolio like mine is right for you, then you know enough to ignore that advice.
Why do you use VFVA instead of VFMF for US small and large value?
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Re: Five Factor Investing with ETFs

Post by ivgrivchuck »

Francis42 wrote: Sun Apr 04, 2021 7:36 am Do you factor tilt your portfolio? Why or why not? What factors would you choose?
I don't. I have carefully considered though.

- Mainly because the rabbit hole is pretty deep. There are endless ways to implement the factors, and endless argument about how to do it properly (or in the best way).
- Although even though the theory is probably sound, the implementations are often imperfect and may result in significant underperformance.
- As the theory has become common knowledge, there is a significant chance that the impact of these factors won't be as big going forward.

If I decided to go for these, I'd go for the classical size and value, as these are simplest to implement and their explanatory power is around 80% (compared to 95% of the five factor model).

All this being said, I don't see anything wrong with somebody going ahead with this as long as:
1) they are fully committed and ready to put in the extra work and analysis
2) they understand that it's a life time commitment (there is so much noise that even 10-20 years performance doesn't give conclusive results)

Near the end of your life, you'll likely know if it was the right choice...
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Re: Five Factor Investing with ETFs

Post by grabiner »

luckyducky99 wrote: Sun Apr 04, 2021 3:50 pm
grabiner wrote: Sun Apr 04, 2021 1:19 pm ... my portfolio (which is 86% stock with close to the risk of 100% stock because of my overweights of riskier stock).
I kind of like this idea: to look at a portfolio in terms of how risky it is relative to 100% TSM, or 60/40, or whatever. But how do you do that? Put it in portfolio visualizer and compare stddev? Some other way?
I look at how the portfolio performs when the market crashes. In 2007-2009, with a similar portfolio but less of a tilt, I lost 60% top to bottom from a portfolio which was 90% stock; this is the same as the top-to-bottom risk of the total stock market.

But this isn't a perfect measure. I lost more than the market in March 2020, and even more than was indicated by a portfolio which was 88% stock, because value stock was hit particularly hard in that decline.
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Re: Five Factor Investing with ETFs

Post by grabiner »

Morse Code wrote: Sun Apr 04, 2021 5:03 pm
grabiner wrote: Sun Apr 04, 2021 1:19 pm I care more about the value and size factors, but I have a stronger overweight than you do, even with similar funds. For years, I have held 25% growth and 75% value, which means equal amounts in value and blend funds. I use AVDV for international small-cap value, IVLU (iShares MSCI EAFE Factor Value ETF) for international large-cap value, and VFVA (Vanguard Factor Value ETF) for US large-cap and small-cap value.
Why do you use VFVA instead of VFMF for US small and large value?
Because I am more interested in the value factor, so I choose the funds with the best value exposure. I get some exposure to other factors incidentally from AVDV, but it isn't worth giving up the lower cost of VFVA to do something similar with US funds from Avantis.
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Re: Five Factor Investing with ETFs

Post by Morse Code »

grabiner wrote: Sun Apr 04, 2021 7:20 pm
Morse Code wrote: Sun Apr 04, 2021 5:03 pm
grabiner wrote: Sun Apr 04, 2021 1:19 pm I care more about the value and size factors, but I have a stronger overweight than you do, even with similar funds. For years, I have held 25% growth and 75% value, which means equal amounts in value and blend funds. I use AVDV for international small-cap value, IVLU (iShares MSCI EAFE Factor Value ETF) for international large-cap value, and VFVA (Vanguard Factor Value ETF) for US large-cap and small-cap value.
Why do you use VFVA instead of VFMF for US small and large value?
Because I am more interested in the value factor, so I choose the funds with the best value exposure. I get some exposure to other factors incidentally from AVDV, but it isn't worth giving up the lower cost of VFVA to do something similar with US funds from Avantis.
Thanks, grabiner.

My equity portfolio consists primarily of two ETFs, VFMF (Vanguard Multi-Factor) and VSS (int'l small cap index). In combination, these two give me small and value tilts, exposure to emerging markets, and strike a cost balance I'm comfortable with; not as cheap as pure indexing, but not as pricey as the Avantis offerings. VSS is a blend, but I understand int'l small is "valuey" by it's very nature. Not sure how true that is. I'm happy with these two and not really second-guessing myself, but I do like to re-visit my selections and get other opinions from time to time.

Avantis seems to be the best-in-class choice these days, but what do you factor-heads think about VFMF/VSS and my rationale for using them? Any pros/cons I haven't considered?
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Re: Five Factor Investing with ETFs

Post by YRT70 »

Francis42 wrote: Sun Apr 04, 2021 12:52 pm
YRT70 wrote: Sun Apr 04, 2021 8:22 am
Francis42 wrote: Sun Apr 04, 2021 7:36 am Hiyo,

I’m a big fan of Ben felix’s common sense investing and got indoctrinated into factor models in B-school. I’ve been building my own portfolio with factor tilts (size, value, profitability) and this paper was recently published by Ben. Pretty close to my target AA, but it’s given me a bit to chew on in terms of constructive changes. It’s using Canadian funds in its model portfolio and I’ve tried to construct it from a US fund perspective.

Paper: https://www.pwlcapital.com/wp-content/u ... h-ETFs.pdf

Model portfolio:
Vti - 60%
AVUV - 10%
Vxus - 16%
Avdv - 6%
Vwo -8%

Curious to get people’s thoughts...

Do you factor tilt your portfolio? Why or why not? What factors would you choose?

What do folks think of the AA of the above model portfolio?
I've been following Ben Felix for a while. I think he brings out great material. I like the model portfolio. I use virtually the same funds but I choose for a stronger SCV tilt.

The one thing I always wonder about is whether adding momentum to it would improve it. Some people choose to add separate momentum funds (e.g. QMOM), some people choose multi factor funds that target momentum too (e.g. VFMF, SMLF).

If you like to see more discussion about factors there's a dedicated small cap value thread: viewtopic.php?f=10&t=282533

The Rational Reminder forum is also good: https://community.rationalreminder.ca/
I'm hesitant to pursue momentum because of transaction costs. I'm looking to blend size, value, and profitability.

Mind if I ask your allocation to SCV?
Slightly above 50% of my portfolio. It is my understanding that a slight tilt (e.g. 16%) doesn't really capture significant exposure to the other risk factors size, value and profitability. It's still dominated by the market factor.

With a strong tilt like I have tracking error tolerance has been a real challenge though. Much greater than I thought.

On the Rational Reminder forum there's currently a big discussion about why the RR Model portfolio 'only' contains a ~16% tilt. I think it's mainly because they wanted to keep risk the same as a normal market cap portfolio and they also wanted to simulate the DFA model portfolios.
https://community.rationalreminder.ca/t ... d-why/6264
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Francis42
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Re: Five Factor Investing with ETFs

Post by Francis42 »

YRT70 wrote: Mon Apr 05, 2021 6:40 am
Francis42 wrote: Sun Apr 04, 2021 12:52 pm
YRT70 wrote: Sun Apr 04, 2021 8:22 am
Francis42 wrote: Sun Apr 04, 2021 7:36 am Hiyo,

I’m a big fan of Ben felix’s common sense investing and got indoctrinated into factor models in B-school. I’ve been building my own portfolio with factor tilts (size, value, profitability) and this paper was recently published by Ben. Pretty close to my target AA, but it’s given me a bit to chew on in terms of constructive changes. It’s using Canadian funds in its model portfolio and I’ve tried to construct it from a US fund perspective.

Paper: https://www.pwlcapital.com/wp-content/u ... h-ETFs.pdf

Model portfolio:
Vti - 60%
AVUV - 10%
Vxus - 16%
Avdv - 6%
Vwo -8%

Curious to get people’s thoughts...

Do you factor tilt your portfolio? Why or why not? What factors would you choose?

What do folks think of the AA of the above model portfolio?
I've been following Ben Felix for a while. I think he brings out great material. I like the model portfolio. I use virtually the same funds but I choose for a stronger SCV tilt.

The one thing I always wonder about is whether adding momentum to it would improve it. Some people choose to add separate momentum funds (e.g. QMOM), some people choose multi factor funds that target momentum too (e.g. VFMF, SMLF).

If you like to see more discussion about factors there's a dedicated small cap value thread: viewtopic.php?f=10&t=282533

The Rational Reminder forum is also good: https://community.rationalreminder.ca/
I'm hesitant to pursue momentum because of transaction costs. I'm looking to blend size, value, and profitability.

Mind if I ask your allocation to SCV?
Slightly above 50% of my portfolio. It is my understanding that a slight tilt (e.g. 16%) doesn't really capture significant exposure to the other risk factors size, value and profitability. It's still dominated by the market factor.

With a strong tilt like I have tracking error tolerance has been a real challenge though. Much greater than I thought.

On the Rational Reminder forum there's currently a big discussion about why the RR Model portfolio 'only' contains a ~16% tilt. I think it's mainly because they wanted to keep risk the same as a normal market cap portfolio and they also wanted to simulate the DFA model portfolios.
https://community.rationalreminder.ca/t ... d-why/6264

Super helpful! Thanks! Interesting that they are looking to make SCV about 25% of the portfolio. I'm assuming they are considering the portion of total market indexes (i.e. VTI and VXUS) that are weighted to SCV in addition to the SCV specific funds?
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Re: Five Factor Investing with ETFs

Post by YRT70 »

Francis42 wrote: Mon Apr 05, 2021 10:14 am Super helpful! Thanks! Interesting that they are looking to make SCV about 25% of the portfolio. I'm assuming they are considering the portion of total market indexes (i.e. VTI and VXUS) that are weighted to SCV in addition to the SCV specific funds?
The way I see it a portfolio of 50% VTI/VXUS and 50% AVUV and AVDV is a 50% tilt.

In reality it's slightly more indeed because VTI also contains some SCV.
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Re: Five Factor Investing with ETFs

Post by Northern Flicker »

The US part of the portfolio has a factor tilt. The non-US part does not. Looking at the US part, you have a fairly even balance between exposure to size, value, and quality:

https://www.portfoliovisualizer.com/fac ... tion3_1=13

The non-US portfolio has an EM tilt. My only comment there is that you could implement it a little more cheaply (about 1.1bp cheaper) and more clearly using VEA and VWO instead of VXUS and VWO. VXUS is about 75% DM and 25% EM, so the non-US part instead could be:

12% VEA
12% VWO

and you would be holding the same non-US portfolio, just packaged differently. (Nitpicky point: Vanguard shows VXUS to be 26.2% EM as of 2/28/21).
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Five Factor Investing with ETFs

Post by Northern Flicker »

YRT70 wrote: Mon Apr 05, 2021 11:55 am
Francis42 wrote: Mon Apr 05, 2021 10:14 am Super helpful! Thanks! Interesting that they are looking to make SCV about 25% of the portfolio. I'm assuming they are considering the portion of total market indexes (i.e. VTI and VXUS) that are weighted to SCV in addition to the SCV specific funds?
The way I see it a portfolio of 50% VTI/VXUS and 50% AVUV and AVDV is a 50% tilt.

In reality it's slightly more indeed because VTI also contains some SCV.
VTI does not contribute anything to a tilt. It is by definition the untilted market portfolio. A tilt is not defined by what percentage of your portfolio is allocated to assets called SCV (or whatever factor-based asset class is of interest).

VTI dilutes, rather than increases the tilt implemented by a SCV fund.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Five Factor Investing with ETFs

Post by YRT70 »

Northern Flicker wrote: Mon Apr 05, 2021 12:45 pm
YRT70 wrote: Mon Apr 05, 2021 11:55 am
Francis42 wrote: Mon Apr 05, 2021 10:14 am Super helpful! Thanks! Interesting that they are looking to make SCV about 25% of the portfolio. I'm assuming they are considering the portion of total market indexes (i.e. VTI and VXUS) that are weighted to SCV in addition to the SCV specific funds?
The way I see it a portfolio of 50% VTI/VXUS and 50% AVUV and AVDV is a 50% tilt.

In reality it's slightly more indeed because VTI also contains some SCV.
VTI does not contribute anything to a tilt. It is by definition the untilted market portfolio. A tilt is not defined by what percentage of your portfolio is allocated to assets called SCV (or whatever factor-based asset class is of interest).

VTI dilutes, rather than increases the tilt implemented by a SCV fund.
true...
DanFFA
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Re: Five Factor Investing with ETFs

Post by DanFFA »

This is a good portfolio for most people, however, I have been to his community where he mentioned a version for US investors as follows:
Similarly not advice (especially if you are in the US!)
If we take out the home bias in the RR model - which has no tilt - and keep everything the same including the 75/25 beta SCV split on US and International + EM (the SCV is only Developed, but it is 25% of Developed + EM weight), here is what I get:
45% VTI
22% VEA
14% AVUV
11% VWO (or other emerging markets etf)
8% AVDV
I followed the same overall characteristics methodology to roughly match this portfolio to DFA World Equity (no Canada bias) as I did with the posted RR portfolio relative to DFA Global Equity (30% Canada bias). You can see in both cases the ETF portfolios are similar-ish to the funds.
It's worth noting the following:
  • This is meant to allow everyday retail investors the ability to invest similarly to the DFA portfolio Felix invests in himself and his clients invest into.
  • Felix has stated that his portfolio is a one-fund portfolio and if he didn't have access to DFA he would still invest in a one-fund portfolio.
  • Felix later walked back that statement somewhat when Passiv(A Canadian for-profit tool with a similar pie system to M1Finance) was pointed out to him.
  • This is a relatively conservatively factor-tilted portfolio that augments a total-market portfolio to out perform a standard total-market portfolio
  • This is a 100% Stock portfolio add bonds as fit to your personal circumstances' risk tolerance and time horizon.
  • Making yourself an IPS(Investment Policy Statement) is a good idea. A detailed step-by-step guide to making a DIY IPS as a retail investor is in his community forums if you do a search in them, however, bogleheads has a perfectly fit guide right here: https://www.bogleheads.org/wiki/Investm ... _statement
Last edited by DanFFA on Tue Apr 06, 2021 11:22 pm, edited 1 time in total.
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Re: Five Factor Investing with ETFs

Post by drk »

DanFFA wrote: Tue Apr 06, 2021 1:01 am 45% VTI
22% VEA
14% AVUV
11% IEMG (or other emerging markets etf)
8% AVDV
If someone wants to use this, they should swap IEMG for VWO, SPEM, or SCHE if they don't intend to overweight Korean stocks.
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Re: Five Factor Investing with ETFs

Post by YRT70 »

DanFFA wrote: Tue Apr 06, 2021 1:01 am 45% VTI
22% VEA
14% AVUV
11% IEMG (or other emerging markets etf)
8% AVDV
Why not VXUS instead of VEA + IEMG?
DanFFA
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Re: Five Factor Investing with ETFs

Post by DanFFA »

drk wrote: Tue Apr 06, 2021 1:11 am
DanFFA wrote: Tue Apr 06, 2021 1:01 am 45% VTI
22% VEA
14% AVUV
11% IEMG (or other emerging markets etf)
8% AVDV
If someone wants to use this, they should swap IEMG for VWO, SPEM, or SCHE if they don't intend to overweight Korean stocks.
Good point. Edited the post accordingly. I even recall Felix mentioning that in his podcast initially announcing the portfolio! Disappointed in myself for overlooking that. :oops:
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Re: Five Factor Investing with ETFs

Post by liftingbrosef »

YRT70 wrote: Tue Apr 06, 2021 1:25 am
DanFFA wrote: Tue Apr 06, 2021 1:01 am 45% VTI
22% VEA
14% AVUV
11% IEMG (or other emerging markets etf)
8% AVDV
Why not VXUS instead of VEA + IEMG?
Wondering the same thing. 5 funds is easier than 6 funds. Does Ben advocate slightly overweighting Emerging Markets? At 11% for VWO/IEMG and 22% for VEA...that is placing emerging markets at 1/3 of international right? And I believe market cap may be closer to 20%
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Re: Five Factor Investing with ETFs

Post by YRT70 »

liftingbrosef wrote: Wed Apr 07, 2021 7:21 am
YRT70 wrote: Tue Apr 06, 2021 1:25 am
DanFFA wrote: Tue Apr 06, 2021 1:01 am 45% VTI
22% VEA
14% AVUV
11% IEMG (or other emerging markets etf)
8% AVDV
Why not VXUS instead of VEA + IEMG?
Wondering the same thing. 5 funds is easier than 6 funds. Does Ben advocate slightly overweighting Emerging Markets? At 11% for VWO/IEMG and 22% for VEA...that is placing emerging markets at 1/3 of international right? And I believe market cap may be closer to 20%
I haven't worked out the numbers but yeah, it feels like overweighting EM.

I'm not sure if I remember right but I thought iShares is following a different EM index than Vanguard which may lead to differences like South Korea being included or not. Someone probably knows better.
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Re: Five Factor Investing with ETFs

Post by absolute zero »

liftingbrosef wrote: Wed Apr 07, 2021 7:21 am
YRT70 wrote: Tue Apr 06, 2021 1:25 am
DanFFA wrote: Tue Apr 06, 2021 1:01 am 45% VTI
22% VEA
14% AVUV
11% IEMG (or other emerging markets etf)
8% AVDV
Why not VXUS instead of VEA + IEMG?
Wondering the same thing. 5 funds is easier than 6 funds. Does Ben advocate slightly overweighting Emerging Markets? At 11% for VWO/IEMG and 22% for VEA...that is placing emerging markets at 1/3 of international right? And I believe market cap may be closer to 20%
You forgot to include AVDV in the international bucket. 11% is precisely the percentage of the global equity market that is comprised of emerging markets. So this portfolio does not overweight EM.
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Re: Five Factor Investing with ETFs

Post by secondopinion »

Francis42 wrote: Sun Apr 04, 2021 7:36 am Do you factor tilt your portfolio? Why or why not? What factors would you choose?
Yes. I am inherently small- and mid-cap tilted; it is the only constant tilt I have. Value is neutralized (I am specifically 50/50) so that regardless of the market conditions that I do not favor either position (seeing that value and growth can be disconnected at times with their behavior), I tend to ignore the other factors because it is not easy to maintain more than two factors at a time.
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Re: Five Factor Investing with ETFs

Post by nisiprius »

David Jay wrote: Sun Apr 04, 2021 8:10 am Five-factor investing was “the latest thing” starting about 10 years ago. A number of 5-factor funds and ETFs opened between 2014 and 2018.

Performance has been disappointing. Last week a question prompted me to go look at the performance. I looked at 3, including the Vanguard fund and the largest (by assets) fund, all 3 had dramatically underperformed the SP500 over the life of the fund.

These days one will find few references to Five Factor investing in the financial industry, the industry has moved on to newer fads.
Journal of Financial Economics
Volume 116, Issue 1, April 2015, Pages 1-22
Journal of Financial Economics
A five-factor asset pricing model
Eugene F. ama and Kenneth R. French

It's only six years old. And it's discredited already? Wow.

Of course there was something weird about it. According to the paper, it is really only a four-factor model: "With the addition of profitability and investment factors, the value factor of the FF three-factor model becomes redundant for describing average returns in the sample we examine." They weren't saying that the value factor doesn't exist, but they were seemingly saying that market, size, profitability and investment provided as good a description as they could get, and that including value didn't make it any better.

So why did they even retain it in the model? For auld lang syne, I guess.
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Re: Five Factor Investing with ETFs

Post by David Jay »

nisiprius wrote: Thu Apr 08, 2021 3:11 pm
David Jay wrote: Sun Apr 04, 2021 8:10 am Five-factor investing was “the latest thing” starting about 10 years ago. A number of 5-factor funds and ETFs opened between 2014 and 2018.

Performance has been disappointing. Last week a question prompted me to go look at the performance. I looked at 3, including the Vanguard fund and the largest (by assets) fund, all 3 had dramatically underperformed the SP500 over the life of the fund.

These days one will find few references to Five Factor investing in the financial industry, the industry has moved on to newer fads.
Journal of Financial Economics
Volume 116, Issue 1, April 2015, Pages 1-22
Journal of Financial Economics
A five-factor asset pricing model
Eugene F. ama and Kenneth R. French

It's only six years old. And it's discredited already? Wow.

Of course there was something weird about it. According to the paper, it is really only a four-factor model: "With the addition of profitability and investment factors, the value factor of the FF three-factor model becomes redundant for describing average returns in the sample we examine." They weren't saying that the value factor doesn't exist, but they were seemingly saying that market, size, profitability and investment provided as good a description as they could get, and that including value didn't make it any better.

So why did they even retain it in the model? For auld lang syne, I guess.
It seems to me that it is the 5-Factor funds which are disappointing. Each seems to have it's own weighting, but the ones I looked at are underperforming the good ol' SP500.

Well, there are always "risk parity" funds. :wink:
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Re: Five Factor Investing with ETFs

Post by Wade Garrett »

Value and momentum have the strongest premiums. They also play play well together and form a sort of barbell portfolio.

Combine size with value to get the strongest value premium. I would also use SCV ETFs with a quality/profitability screen or at least a negative momentum screen (though some prefer pure SCV without the screens).

Minimum volatility and momentum also play well together and form a sort of barbell portfolio.

Me personally I'm 40% min vol, 30% SCV (with quality screens), 30% momentum.
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Re: Five Factor Investing with ETFs

Post by BrooklynInvest »

I don't.

One, it looks like work.

Two, it looks like relying on fancy backtesting so it's over my head.

I sleep OK.
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Re: Five Factor Investing with ETFs

Post by FiveFactor »

I am convinced that factors represent persistent risk premiums over time and benefit from lack of perfect correlation. For example, my portfolio in my signature has the same volatility and max drawdown as my benchmark (50/50 us/intl market cap weighting), all while having significantly higher expected returns.

Diversification is the only free lunch
35% AVUV Advantis US Small Value | 15% VTI Vanguard Total Market | 15% AVDV Advantis Intl Small Value | 15% AVEM Advantis Emerging Markets | 15% VXUS Vanguard Global Ex-US | 5% “High” yield savings
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Re: Five Factor Investing with ETFs

Post by abuss368 »

Francis42 wrote: Sun Apr 04, 2021 7:36 am Hiyo,

I’m a big fan of Ben felix’s common sense investing and got indoctrinated into factor models in B-school. I’ve been building my own portfolio with factor tilts (size, value, profitability) and this paper was recently published by Ben. Pretty close to my target AA, but it’s given me a bit to chew on in terms of constructive changes. It’s using Canadian funds in its model portfolio and I’ve tried to construct it from a US fund perspective.

Paper: https://www.pwlcapital.com/wp-content/u ... h-ETFs.pdf

Model portfolio:
Vti - 60%
AVUV - 10%
Vxus - 16%
Avdv - 6%
Vwo -8%

Curious to get people’s thoughts...

Do you factor tilt your portfolio? Why or why not? What factors would you choose?

What do folks think of the AA of the above model portfolio?

Any perspectives of Avantis funds? I’m excited that a DFA-like product is hitting the market and becoming more accessible.

Looking forward to hearing thoughts. Huge plug for Ben’s work - his content is top notch.
This was all the rage a few years back. I don’t think the performance has been all that great. I would consider total market index funds.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Five Factor Investing with ETFs

Post by YRT70 »

FiveFactor wrote: Fri Apr 09, 2021 4:16 pm I am convinced that factors represent persistent risk premiums over time and benefit from lack of perfect correlation. For example, my portfolio in my signature has the same volatility and max drawdown as my benchmark (50/50 us/intl market cap weighting), all while having significantly higher expected returns.

Diversification is the only free lunch
Interesting. How did you calculate that? My portfolio on the equity side is very similar but I hold less AVUV and more AVDV. I'm in Europe though.
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Re: Five Factor Investing with ETFs

Post by YRT70 »

abuss368 wrote: Fri Apr 09, 2021 4:19 pm
Francis42 wrote: Sun Apr 04, 2021 7:36 am Hiyo,

I’m a big fan of Ben felix’s common sense investing and got indoctrinated into factor models in B-school. I’ve been building my own portfolio with factor tilts (size, value, profitability) and this paper was recently published by Ben. Pretty close to my target AA, but it’s given me a bit to chew on in terms of constructive changes. It’s using Canadian funds in its model portfolio and I’ve tried to construct it from a US fund perspective.

Paper: https://www.pwlcapital.com/wp-content/u ... h-ETFs.pdf

Model portfolio:
Vti - 60%
AVUV - 10%
Vxus - 16%
Avdv - 6%
Vwo -8%

Curious to get people’s thoughts...

Do you factor tilt your portfolio? Why or why not? What factors would you choose?

What do folks think of the AA of the above model portfolio?

Any perspectives of Avantis funds? I’m excited that a DFA-like product is hitting the market and becoming more accessible.

Looking forward to hearing thoughts. Huge plug for Ben’s work - his content is top notch.
This was all the rage a few years back. I don’t think the performance has been all that great. I would consider total market index funds.

Tony
Judging a strategy based on a few years of performance is probably not a good idea.
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Re: Five Factor Investing with ETFs

Post by abuss368 »

YRT70 wrote: Sat Apr 10, 2021 2:06 am
abuss368 wrote: Fri Apr 09, 2021 4:19 pm
Francis42 wrote: Sun Apr 04, 2021 7:36 am Hiyo,

I’m a big fan of Ben felix’s common sense investing and got indoctrinated into factor models in B-school. I’ve been building my own portfolio with factor tilts (size, value, profitability) and this paper was recently published by Ben. Pretty close to my target AA, but it’s given me a bit to chew on in terms of constructive changes. It’s using Canadian funds in its model portfolio and I’ve tried to construct it from a US fund perspective.

Paper: https://www.pwlcapital.com/wp-content/u ... h-ETFs.pdf

Model portfolio:
Vti - 60%
AVUV - 10%
Vxus - 16%
Avdv - 6%
Vwo -8%

Curious to get people’s thoughts...

Do you factor tilt your portfolio? Why or why not? What factors would you choose?

What do folks think of the AA of the above model portfolio?

Any perspectives of Avantis funds? I’m excited that a DFA-like product is hitting the market and becoming more accessible.

Looking forward to hearing thoughts. Huge plug for Ben’s work - his content is top notch.
This was all the rage a few years back. I don’t think the performance has been all that great. I would consider total market index funds.

Tony
Judging a strategy based on a few years of performance is probably not a good idea.
That is reasonable. All strategies will probably have a day in the sun.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Five Factor Investing with ETFs

Post by FiveFactor »

YRT70 wrote: Sat Apr 10, 2021 2:04 am
FiveFactor wrote: Fri Apr 09, 2021 4:16 pm I am convinced that factors represent persistent risk premiums over time and benefit from lack of perfect correlation. For example, my portfolio in my signature has the same volatility and max drawdown as my benchmark (50/50 us/intl market cap weighting), all while having significantly higher expected returns.

Diversification is the only free lunch
Interesting. How did you calculate that? My portfolio on the equity side is very similar but I hold less AVUV and more AVDV. I'm in Europe though.
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35% AVUV Advantis US Small Value | 15% VTI Vanguard Total Market | 15% AVDV Advantis Intl Small Value | 15% AVEM Advantis Emerging Markets | 15% VXUS Vanguard Global Ex-US | 5% “High” yield savings
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