Small Cap Value heads Rejoice !!!

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YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

jason2459 wrote: Fri Apr 30, 2021 7:39 am Well, MTUM is an index fund and it's not hidden. It follows a MSCI index.
Sure, I'm aware. I don't think that's what they meant though with 'closet index fund'. They go into much more detail in the thread linked above (also about your other question).
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RovenSkyfall
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Re: Small Cap Value heads Rejoice !!!

Post by RovenSkyfall »

MotoTrojan wrote: Thu Apr 29, 2021 5:11 pm
RovenSkyfall wrote: Thu Apr 29, 2021 12:08 pm
MotoTrojan wrote: Thu Apr 29, 2021 11:48 am So with all the talk on momentum screens, curious how many of you outright are trying to achieve positive momentum exposure to compliment your value-heavy portfolios?

The idea is getting more and more appealing to me... as long as the premium offsets the expenses it should improve efficiency and return, and if there is a net-premium, even better!

Don't have the conviction to go all-in with Alpha Architect momentum products like I nearly am on the value side, but the MSCI products seem to have harvested a good premium over the indices life, and since actual ETF inceptions (MTUM & IMTM).
Have you looked at a multifactor fund like VFMF?
While I understand the merit of them, intuitively I feel better about holding value and momentum separately rather than using a composite multi-factor approach. I also really believe in the Alpha Architect approach to value fund construction and wouldn't want to eliminate that allocation.
You might find this discussion helpful: https://community.rationalreminder.ca/t ... actor/1133
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caklim00
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

YRT70 wrote: Fri Apr 30, 2021 8:19 am
caklim00 wrote: Fri Apr 30, 2021 7:17 am
YRT70 wrote: Fri Apr 30, 2021 3:34 am
MotoTrojan wrote: Thu Apr 29, 2021 6:07 pm
LaughingStoic wrote: Thu Apr 29, 2021 5:47 pm

Have you checked out the Rational Reminder forum? There have been fascinating conversations over there recently on using momentum and AA funds as part of a value heavy portfolio. If you haven't, I highly recommend it- pure brain candy.

Here's a link to one of them: https://community.rationalreminder.ca/t ... d-why/6264
Thanks sounds fun, been meaning to check it out, will poke around.
I was about to send you a message about that. That thread is very interesting.

The whole discussion has got me very interested in getting some QMOM/IMOM or VFMO.

They're calling MTUM & IMTM 'closet index funds' there. I'm not sure how accurate that is but I think those funds benefitted a lot from the recent mega cap growth spurt. VFMO could make a better alternative.
Why QMOM over VFMO. .49 ER vs .13 seems like a high hurdle. And, 50 holdings vs 747.
Because it is more concentrated it can get much deeper momentum exposure. If one adds QMOM to their portfolio they'll need less of it to get the same factor loads.

The negative correlation between momentum and SCV I find quite appealing.
I just recall hearing the same argument about RZV over 10 years ago about needing less of it to pair with total stock market. Can you avoid negative alpha via just 50 stocks?
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

caklim00 wrote: Fri Apr 30, 2021 9:10 am
YRT70 wrote: Fri Apr 30, 2021 8:19 am
caklim00 wrote: Fri Apr 30, 2021 7:17 am
YRT70 wrote: Fri Apr 30, 2021 3:34 am
MotoTrojan wrote: Thu Apr 29, 2021 6:07 pm

Thanks sounds fun, been meaning to check it out, will poke around.
I was about to send you a message about that. That thread is very interesting.

The whole discussion has got me very interested in getting some QMOM/IMOM or VFMO.

They're calling MTUM & IMTM 'closet index funds' there. I'm not sure how accurate that is but I think those funds benefitted a lot from the recent mega cap growth spurt. VFMO could make a better alternative.
Why QMOM over VFMO. .49 ER vs .13 seems like a high hurdle. And, 50 holdings vs 747.
Because it is more concentrated it can get much deeper momentum exposure. If one adds QMOM to their portfolio they'll need less of it to get the same factor loads.

The negative correlation between momentum and SCV I find quite appealing.
I just recall hearing the same argument about RZV over 10 years ago about needing less of it to pair with total stock market. Can you avoid negative alpha via just 50 stocks?
That's a good question. I'll ask the guys at the RR forum.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

caklim00 wrote: Fri Apr 30, 2021 9:10 am I just recall hearing the same argument about RZV over 10 years ago about needing less of it to pair with total stock market. Can you avoid negative alpha via just 50 stocks?
Ben Felix goes into it here: https://community.rationalreminder.ca/t ... y/6264/493
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

YRT70 wrote: Fri Apr 30, 2021 3:34 am
They're calling MTUM & IMTM 'closet index funds' there. I'm not sure how accurate that is but I think those funds benefitted a lot from the recent mega cap growth spurt. VFMO could make a better alternative.
Are they as supercharged as VFMO or QMOM/IMOM? Probably not. But looking at the regressions and the raw-returns for the full index they seem to capture a good bit of momentum without needing to deviate from large/mega-cap realm. Cliff A has shown that while value does take a hit in larger caps, momentum is quite strong across the board. It seems to me that they could still add value to diversify a small-value heavy portfolio without having the entire thing in small-caps. With a SCV heavy portfolio, replacing the TSM holdings with hardcore momentum (AA indices) increased overall volatility while replacing TSM with the MSCI mom indices actually reduces overall volatility.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

MotoTrojan wrote: Fri Apr 30, 2021 10:44 am ...With a SCV heavy portfolio, replacing the TSM holdings with hardcore momentum (AA indices) increased overall volatility..
Did you read the thread on the RR board? I got the opposite impression.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

YRT70 wrote: Fri Apr 30, 2021 11:13 am
MotoTrojan wrote: Fri Apr 30, 2021 10:44 am ...With a SCV heavy portfolio, replacing the TSM holdings with hardcore momentum (AA indices) increased overall volatility..
Did you read the thread on the RR board? I got the opposite impression.
I am speaking about the raw index data going back to 1996. The RR board is correct in saying that a more pure momentum (more volatile) should increase overall portfolio efficiency, as measured by Sharpe ratio (my data does support that), but it does so by increasing overall portfolio volatility, and just increasing return even more. In the MSCI case there was still an increase to overall return but overall volatility actually came down (so Sharpe went up, just not as much as the super-charged 100% AA version).

So if your goal was to maintain similar (or even reduce) overall portfolio risk, but increase expected return/efficiency, than replacing your TSM with MSCI momentum (in a heavily SCV tilted portfolio) makes the most sense. If your goal is to get the maximally efficient and highest returning portfolio, and you are willing to accept higher overall risk, than using the AlphaA momentum funds in place of TSM seems to make sense.

Here is an example comparing three portfolios from 1996 to ~ present:

Port 1 (roughly my port): 20% equally in QVAL, IVAL, DFSVX, VTI, VXUS

Port 2: 20% equally in QVAL, IVAL, DFSVX, MTUM, IMTM

Port 3: 20% equally in QVAL, IVAL, DFSVX, QMOM, IMOM

Shows exactly what I described above, MSCI momentum increased return and reduced overall portfolio risk while Alpha Architect momentum increased Sharpe ratio but resulted in more overall risk.

Image
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

MotoTrojan wrote: Fri Apr 30, 2021 11:37 am I am speaking about the raw index data going back to 1996.
Definitely interesting stuff. Did you read the whole thread on the RR board? (just want to make sure you saw everything I saw)

Can you link to your portfoliovisualizer input?
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vineviz
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

Folks who are interested in adding momentum to a SCV portfolio should be sure to evaluate Invesco S&P SmallCap Value with Momentum ETF (XSVM) and Invesco S&P MidCap Value with Momentum ETF (XMVM).

The methodology of these funds means that they don't quite replicate the "go anywhere" style of VFMO or QMOM, but on the other hand they can be used to tune up the momentum exposure without sacrificing the value exposure as a QMOM/QVAL combination sometimes will.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

YRT70 wrote: Fri Apr 30, 2021 11:48 am
MotoTrojan wrote: Fri Apr 30, 2021 11:37 am I am speaking about the raw index data going back to 1996.
Definitely interesting stuff. Did you read the whole thread on the RR board? (just want to make sure you saw everything I saw)

Can you link to your portfoliovisualizer input?
Haven't read it all, very insightful group of people though.

MSCI data came direct from MSCI, AlphaA data is their net (2% knockdown) index for all funds. I can't share the link since it is raw input data.

To be fair, the most applicable comparison would be to reduce AA momentum exposure until overall portfolio volatility is the same as the MSCI, and see which has a higher return (Sharpe). I actually tried this just now and interestingly found that at no point between 0 and 40% allocation do the AA funds reduce overall portfolio volatility from the TSM case (and thus don't even get close to the MSCI case). So you can ONLY increase risk by adding AA momentum it seems (albeit you do get the maximum efficiency increase), where-as the MSCI historically was able to reduce overall risk and still get enough efficiency boost to increase absolute return.
Last edited by MotoTrojan on Fri Apr 30, 2021 12:15 pm, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

vineviz wrote: Fri Apr 30, 2021 12:09 pm Folks who are interested in adding momentum to a SCV portfolio should be sure to evaluate Invesco S&P SmallCap Value with Momentum ETF (XSVM) and Invesco S&P MidCap Value with Momentum ETF (XMVM).

The methodology of these funds means that they don't quite replicate the "go anywhere" style of VFMO or QMOM, but on the other hand they can be used to tune up the momentum exposure without sacrificing the value exposure as a QMOM/QVAL combination sometimes will.
The XSVM ETF itself has changed index MANY times (wouldn't hold it in taxable if I were you) so you can't look at the returns, but I saw a screengrab of the raw index and it was very, very impressive.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

vineviz wrote: Fri Apr 30, 2021 12:09 pm Folks who are interested in adding momentum to a SCV portfolio should be sure to evaluate Invesco S&P SmallCap Value with Momentum ETF (XSVM) and Invesco S&P MidCap Value with Momentum ETF (XMVM).

The methodology of these funds means that they don't quite replicate the "go anywhere" style of VFMO or QMOM, but on the other hand they can be used to tune up the momentum exposure without sacrificing the value exposure as a QMOM/QVAL combination sometimes will.
Interesting. How would this compare to iShares SMLF? Multifactor small cap
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

MotoTrojan wrote: Fri Apr 30, 2021 12:13 pm
YRT70 wrote: Fri Apr 30, 2021 11:48 am
MotoTrojan wrote: Fri Apr 30, 2021 11:37 am I am speaking about the raw index data going back to 1996.
Definitely interesting stuff. Did you read the whole thread on the RR board? (just want to make sure you saw everything I saw)

Can you link to your portfoliovisualizer input?
Haven't read it all, very insightful group of people though.

MSCI data came direct from MSCI, AlphaA data is their net (2% knockdown) index for all funds. I can't share the link since it is raw input data.

To be fair, the most applicable comparison would be to reduce AA momentum exposure until overall portfolio volatility is the same as the MSCI, and see which has a higher return (Sharpe). I actually tried this just now and interestingly found that at no point between 0 and 40% allocation do the AA funds reduce overall portfolio volatility from the TSM case (and thus don't even get close to the MSCI case). So you can ONLY increase risk by adding AA momentum it seems (albeit you do get the maximum efficiency increase), where-as the MSCI historically was able to reduce overall risk and still get enough efficiency boost to increase absolute return.
Thanks. That was exactly what I was wondering.

What you wrote earlier is what I'm after: I'd like to reduce risk and keep expected return similar. So MTUM/IMTM may make the most sense for me.
If your goal was to maintain similar (or even reduce) overall portfolio risk, but increase expected return/efficiency, than replacing your TSM with MSCI momentum (in a heavily SCV tilted portfolio) makes the most sense.
I think Steve Reading and Uncorrelated prefer VFMF to combine size, value, quality and momentum. Does anyone know what happened to them? I haven't seen them post for a long time.
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vineviz
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

MotoTrojan wrote: Fri Apr 30, 2021 12:15 pm
vineviz wrote: Fri Apr 30, 2021 12:09 pm Folks who are interested in adding momentum to a SCV portfolio should be sure to evaluate Invesco S&P SmallCap Value with Momentum ETF (XSVM) and Invesco S&P MidCap Value with Momentum ETF (XMVM).

The methodology of these funds means that they don't quite replicate the "go anywhere" style of VFMO or QMOM, but on the other hand they can be used to tune up the momentum exposure without sacrificing the value exposure as a QMOM/QVAL combination sometimes will.
The XSVM ETF itself has changed index MANY times (wouldn't hold it in taxable if I were you) so you can't look at the returns, but I saw a screengrab of the raw index and it was very, very impressive.
You're not kidding about the index changes.
S&P 600 High Momentum Value Index performance prior to 6/15/2011 reflects that of the original Underlying Index, Dynamic Small Cap Value Intellidex Index. From 6/16/2011 to 5/22/2015, performance reflects that of the previous Underlying Index, RAFI Fundamental Small Value Index. From 5/23/2015 to 6/21/2019, performance reflects that of the previous Underlying Index, Russell 2000 Pure Value Index. From 6/21/2019 forward, performance reflects that of the Underlying Index, S&P 600 High Momentum Value Index
https://www.invesco.com/us-rest/content ... dnsName=us
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Re: Small Cap Value heads Rejoice !!!

Post by absolute zero »

YRT70 wrote: Fri Apr 30, 2021 12:32 pm
MotoTrojan wrote: Fri Apr 30, 2021 12:13 pm
YRT70 wrote: Fri Apr 30, 2021 11:48 am
MotoTrojan wrote: Fri Apr 30, 2021 11:37 am I am speaking about the raw index data going back to 1996.
Definitely interesting stuff. Did you read the whole thread on the RR board? (just want to make sure you saw everything I saw)

Can you link to your portfoliovisualizer input?
Haven't read it all, very insightful group of people though.

MSCI data came direct from MSCI, AlphaA data is their net (2% knockdown) index for all funds. I can't share the link since it is raw input data.

To be fair, the most applicable comparison would be to reduce AA momentum exposure until overall portfolio volatility is the same as the MSCI, and see which has a higher return (Sharpe). I actually tried this just now and interestingly found that at no point between 0 and 40% allocation do the AA funds reduce overall portfolio volatility from the TSM case (and thus don't even get close to the MSCI case). So you can ONLY increase risk by adding AA momentum it seems (albeit you do get the maximum efficiency increase), where-as the MSCI historically was able to reduce overall risk and still get enough efficiency boost to increase absolute return.
Thanks. That was exactly what I was wondering.

What you wrote earlier is what I'm after: I'd like to reduce risk and keep expected return similar. So MTUM/IMTM may make the most sense for me.
If your goal was to maintain similar (or even reduce) overall portfolio risk, but increase expected return/efficiency, than replacing your TSM with MSCI momentum (in a heavily SCV tilted portfolio) makes the most sense.
I think Steve Reading and Uncorrelated prefer VFMF to combine size, value, quality and momentum. Does anyone know what happened to them? I haven't seen them post for a long time.
No idea what happened to them, but I do know that we’re not allowed to talk about it per forum rules. In other words, don’t expect any more posts from them.
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Re: Small Cap Value heads Rejoice !!!

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From an expected return perspective, isn't adding a separate momentum fund to the portfolio reducing the overall expected return of portfolio. (Since momentum funds tend to consist of growth stocks most of the time).

Hypothetically, a portfolio of 100% SCV has higher expected return (in absolute returns, not risk-adjusted) compared to 80% SCV + 20% Momentum.

From this perspective, an integrated screening based approach used by DFA, Avantis or RAFI indices is probably more preferable (i.e. rebalancing screened SCV stocks as per the individual stock momentum) as it doesn't sacrifice expected returns but simply attempts to reduce negative momentum exposure.
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Re: Small Cap Value heads Rejoice !!!

Post by jason2459 »

imak wrote: Fri Apr 30, 2021 2:28 pm From an expected return perspective, isn't adding a separate momentum fund to the portfolio reducing the overall expected return of portfolio. (Since momentum funds tend to consist of growth stocks most of the time).

Hypothetically, a portfolio of 100% SCV has higher expected return (in absolute returns, not risk-adjusted) compared to 80% SCV + 20% Momentum.

From this perspective, an integrated screening based approach used by DFA, Avantis or RAFI indices is probably more preferable (i.e. rebalancing screened SCV stocks as per the individual stock momentum) as it doesn't sacrifice expected returns but simply attempts to reduce negative momentum exposure.
Why would a momentum fund tend to be any specific style box? They should consist of what has recently had the greatest price momentum. Past several years has just happen to be growth and more specifically LCG.
Last edited by jason2459 on Fri Apr 30, 2021 2:38 pm, edited 1 time in total.
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MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

imak wrote: Fri Apr 30, 2021 2:28 pm From an expected return perspective, isn't adding a separate momentum fund to the portfolio reducing the overall expected return of portfolio. (Since momentum funds tend to consist of growth stocks most of the time).

Hypothetically, a portfolio of 100% SCV has higher expected return (in absolute returns, not risk-adjusted) compared to 80% SCV + 20% Momentum.

From this perspective, an integrated screening based approach used by DFA, Avantis or RAFI indices is probably more preferable (i.e. rebalancing screened SCV stocks as per the individual stock momentum) as it doesn't sacrifice expected returns but simply attempts to reduce negative momentum exposure.
Historically momentum has outperformed SCV by quite a bit of margin, so this is quite off base.

This 2-part podcast would be a good listen to clear this common misconception up: https://www.theinvestorspodcast.com/epi ... investing/
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jason2459
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Re: Small Cap Value heads Rejoice !!!

Post by jason2459 »

I would expect momentum funds should be shifting if the momentum in value keeps going this year.

https://hsainvestments.com/fundperforma ... ketcycles/
"In the short run, the stock market is a voting machine; in the long run, it is a weighing machine" ~Benjamin Graham
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

jason2459 wrote: Fri Apr 30, 2021 2:38 pm I would expect momentum funds should be shifting if the momentum in value keeps going this year.

https://hsainvestments.com/fundperforma ... ketcycles/
MSCI rebalances late next month :). Alpha Architect's was in February if memory serves so didn't quite get the value rise (Tesla still in both... will take a bit for that to fall off).

Vanguard's VFMO is probably an interesting one to look at more often since it is unconstrained and can trade daily. Unless you specifically want some large/mega-cap exposure with US momentum I think VFMO really deserves some consideration. Way more diverse than QMOM, 13bp vs 49bp, and impressive exposure still.
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

vineviz wrote: Fri Apr 30, 2021 12:33 pm
MotoTrojan wrote: Fri Apr 30, 2021 12:15 pm
vineviz wrote: Fri Apr 30, 2021 12:09 pm Folks who are interested in adding momentum to a SCV portfolio should be sure to evaluate Invesco S&P SmallCap Value with Momentum ETF (XSVM) and Invesco S&P MidCap Value with Momentum ETF (XMVM).

The methodology of these funds means that they don't quite replicate the "go anywhere" style of VFMO or QMOM, but on the other hand they can be used to tune up the momentum exposure without sacrificing the value exposure as a QMOM/QVAL combination sometimes will.
The XSVM ETF itself has changed index MANY times (wouldn't hold it in taxable if I were you) so you can't look at the returns, but I saw a screengrab of the raw index and it was very, very impressive.
You're not kidding about the index changes.
S&P 600 High Momentum Value Index performance prior to 6/15/2011 reflects that of the original Underlying Index, Dynamic Small Cap Value Intellidex Index. From 6/16/2011 to 5/22/2015, performance reflects that of the previous Underlying Index, RAFI Fundamental Small Value Index. From 5/23/2015 to 6/21/2019, performance reflects that of the previous Underlying Index, Russell 2000 Pure Value Index. From 6/21/2019 forward, performance reflects that of the Underlying Index, S&P 600 High Momentum Value Index
https://www.invesco.com/us-rest/content ... dnsName=us
Many of us (myself included) held PXSV when it was the RAFI Fundamental Small Value index. It was a RAFI based SCV fund so basically the best of both worlds. Most of us bailed when they moved to the R2K index. I think it changed tickers from PXSV to XSVM when they moved to the Momentum based fund. I definitely don't trust these guys on not changing the index again. Altruistfa has this as their top SCV fund.
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Re: Small Cap Value heads Rejoice !!!

Post by jason2459 »

MotoTrojan wrote: Fri Apr 30, 2021 2:46 pm
jason2459 wrote: Fri Apr 30, 2021 2:38 pm I would expect momentum funds should be shifting if the momentum in value keeps going this year.

https://hsainvestments.com/fundperforma ... ketcycles/
MSCI rebalances late next month :). Alpha Architect's was in February if memory serves so didn't quite get the value rise (Tesla still in both... will take a bit for that to fall off).

Vanguard's VFMO is probably an interesting one to look at more often since it is unconstrained and can trade daily. Unless you specifically want some large/mega-cap exposure with US momentum I think VFMO really deserves some consideration. Way more diverse than QMOM, 13bp vs 49bp, and impressive exposure still.


I'm looking forward to November's reconstitution for MTUM honestly. Assuming value continues as it has been the past 6 months. That will give value the 12/6 month look MTUM is looking for.

If value stays ahead the next 6 months again and MTUM comes out all LCG after November then it's broken IMO and I'll no longer like it. :D
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Re: Small Cap Value heads Rejoice !!!

Post by imak »

MotoTrojan wrote: Fri Apr 30, 2021 2:36 pm
imak wrote: Fri Apr 30, 2021 2:28 pm From an expected return perspective, isn't adding a separate momentum fund to the portfolio reducing the overall expected return of portfolio. (Since momentum funds tend to consist of growth stocks most of the time).

Hypothetically, a portfolio of 100% SCV has higher expected return (in absolute returns, not risk-adjusted) compared to 80% SCV + 20% Momentum.

From this perspective, an integrated screening based approach used by DFA, Avantis or RAFI indices is probably more preferable (i.e. rebalancing screened SCV stocks as per the individual stock momentum) as it doesn't sacrifice expected returns but simply attempts to reduce negative momentum exposure.
Historically momentum has outperformed SCV by quite a bit of margin, so this is quite off base.

This 2-part podcast would be a good listen to clear this common misconception up: https://www.theinvestorspodcast.com/epi ... investing/
I understand the case for momentum risk premium based on historical statistics, but trying to understand how such a portfolio makes sense "under the hood" (fundamentally, from a Fama-French 3/5 factor perspective).
The holdings of the portfolio should have favorable fundamental metrics (P/E, P/B, P/S, etc) to get a higher expected return.

For example, 80% IJS + 20% MTUM portfolio is currently holding Tesla at higher weights (say 1% TSLA, due to MTUM), compared to 100% IJS (0% TSLA).
Aren't we "diluting" the expected returns of IJS by holding TSLA ?

Or, another way to look at it may be: MTUM has high portfolio turnover hence we don't need to care or inspect underlying holdings of MTUM (i.e. TSLA will be dropped soon if it underperforms so it doesn't matter over the long term)?

I guess my observation boils down to "growth-bias" of momentum funds: momentum on its own, as a sole metric, tends to exhibit growth bias (like MTUM) which reduces expected returns, whereas when momentum is integrated with value as a screening metric, it helps improve expected returns (such as the XSVM ETF discussed above)
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

imak wrote: Fri Apr 30, 2021 3:09 pm
MotoTrojan wrote: Fri Apr 30, 2021 2:36 pm
imak wrote: Fri Apr 30, 2021 2:28 pm From an expected return perspective, isn't adding a separate momentum fund to the portfolio reducing the overall expected return of portfolio. (Since momentum funds tend to consist of growth stocks most of the time).

Hypothetically, a portfolio of 100% SCV has higher expected return (in absolute returns, not risk-adjusted) compared to 80% SCV + 20% Momentum.

From this perspective, an integrated screening based approach used by DFA, Avantis or RAFI indices is probably more preferable (i.e. rebalancing screened SCV stocks as per the individual stock momentum) as it doesn't sacrifice expected returns but simply attempts to reduce negative momentum exposure.
Historically momentum has outperformed SCV by quite a bit of margin, so this is quite off base.

This 2-part podcast would be a good listen to clear this common misconception up: https://www.theinvestorspodcast.com/epi ... investing/
I understand the case for momentum risk premium based on historical statistics, but trying to understand how such a portfolio makes sense "under the hood" (fundamentally, from a Fama-French 3/5 factor perspective).
The holdings of the portfolio should have favorable fundamental metrics (P/E, P/B, P/S, etc) to get a higher expected return.

For example, 80% IJS + 20% MTUM portfolio is currently holding Tesla at higher weights (say 1% TSLA, due to MTUM), compared to 100% IJS (0% TSLA).
Aren't we "diluting" the expected returns of IJS by holding TSLA ?

Or, another way to look at it may be: MTUM has high portfolio turnover hence we don't need to care or inspect underlying holdings of MTUM (i.e. TSLA will be dropped soon if it underperforms so it doesn't matter over the long term)?

I guess my observation boils down to "growth-bias" of momentum funds: momentum on its own, as a sole metric, tends to exhibit growth bias (like MTUM) which reduces expected returns, whereas when momentum is integrated with value as a screening metric, it helps improve expected returns (such as the XSVM ETF discussed above)
Over the long run the positive premium of the MOM factor offsets any negative HmL exposure. Yes you can incorporate screens to a value fund as well to offset negative momentum but that will also eat at your HmL exposure, and won't give you meaningful positive exposure.

Regressing MTUM's full index on a FF 6 factor (5-factor + MOM) gets an HmL of -0.08 with a weak T-stat of -1.1. This isn't great, but even VIVAX, a relatively weak large-value fund, has a loading of 0.26. So a bit of momentum isn't going to kill your HmL exposure overall.

I also don't think it is all a risk-premium as you allude to, most think it is more behavioral. There are several theories such as underreaction to good news, overreaction to good news, or my favorite the disposition effect (people sell winners and hold losers, making it take longer for a stock to move to it's fundamental value after good news comes).
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Re: Small Cap Value heads Rejoice !!!

Post by imak »

MotoTrojan wrote: Fri Apr 30, 2021 3:17 pm
Over the long run the positive premium of the MOM factor offsets any negative HmL exposure. Yes you can incorporate screens to a value fund as well to offset negative momentum but that will also eat at your HmL exposure, and won't give you meaningful positive exposure.

Regressing MTUM's full index on a FF 6 factor (5-factor + MOM) gets an HmL of -0.08 with a weak T-stat of -1.1. This isn't great, but even VIVAX, a relatively weak large-value fund, has a loading of 0.26. So a bit of momentum isn't going to kill your HmL exposure overall.

I also don't think it is all a risk-premium as you allude to, most think it is more behavioral. There are several theories such as underreaction to good news, overreaction to good news, or my favorite the disposition effect (people sell winners and hold losers, making it take longer for a stock to move to it's fundamental value after good news comes).
Thanks for the explanation, it makes sense to consider these HmL vs MOM exposures as trade-offs. I didn't take into account the behavioral risk premium aspects which seem to be dominant in shorter timeframes (1-12 month lookbacks).
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

imak wrote: Fri Apr 30, 2021 3:47 pm
MotoTrojan wrote: Fri Apr 30, 2021 3:17 pm
Over the long run the positive premium of the MOM factor offsets any negative HmL exposure. Yes you can incorporate screens to a value fund as well to offset negative momentum but that will also eat at your HmL exposure, and won't give you meaningful positive exposure.

Regressing MTUM's full index on a FF 6 factor (5-factor + MOM) gets an HmL of -0.08 with a weak T-stat of -1.1. This isn't great, but even VIVAX, a relatively weak large-value fund, has a loading of 0.26. So a bit of momentum isn't going to kill your HmL exposure overall.

I also don't think it is all a risk-premium as you allude to, most think it is more behavioral. There are several theories such as underreaction to good news, overreaction to good news, or my favorite the disposition effect (people sell winners and hold losers, making it take longer for a stock to move to it's fundamental value after good news comes).
Thanks for the explanation, it makes sense to consider these HmL vs MOM exposures as trade-offs. I didn't take into account the behavioral risk premium aspects which seem to be dominant in shorter timeframes (1-12 month lookbacks).
I personally view it as there being behavioral reasons for the premium to exist in the 1st place, and then risk-based reasons for it to not be arbitraged away (momentum can be painful to hold, just like value). Value on the other hand has the same thing, but also has some more clear purely risk-based explanations (companies have higher cost of capital, shakier futures, blah blah).
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Re: Small Cap Value heads Rejoice !!!

Post by Massdriver »

absolute zero wrote: Fri Apr 30, 2021 1:34 pm
YRT70 wrote: Fri Apr 30, 2021 12:32 pm
MotoTrojan wrote: Fri Apr 30, 2021 12:13 pm
YRT70 wrote: Fri Apr 30, 2021 11:48 am
MotoTrojan wrote: Fri Apr 30, 2021 11:37 am I am speaking about the raw index data going back to 1996.
Definitely interesting stuff. Did you read the whole thread on the RR board? (just want to make sure you saw everything I saw)

Can you link to your portfoliovisualizer input?
Haven't read it all, very insightful group of people though.

MSCI data came direct from MSCI, AlphaA data is their net (2% knockdown) index for all funds. I can't share the link since it is raw input data.

To be fair, the most applicable comparison would be to reduce AA momentum exposure until overall portfolio volatility is the same as the MSCI, and see which has a higher return (Sharpe). I actually tried this just now and interestingly found that at no point between 0 and 40% allocation do the AA funds reduce overall portfolio volatility from the TSM case (and thus don't even get close to the MSCI case). So you can ONLY increase risk by adding AA momentum it seems (albeit you do get the maximum efficiency increase), where-as the MSCI historically was able to reduce overall risk and still get enough efficiency boost to increase absolute return.
Thanks. That was exactly what I was wondering.

What you wrote earlier is what I'm after: I'd like to reduce risk and keep expected return similar. So MTUM/IMTM may make the most sense for me.
If your goal was to maintain similar (or even reduce) overall portfolio risk, but increase expected return/efficiency, than replacing your TSM with MSCI momentum (in a heavily SCV tilted portfolio) makes the most sense.
I think Steve Reading and Uncorrelated prefer VFMF to combine size, value, quality and momentum. Does anyone know what happened to them? I haven't seen them post for a long time.
No idea what happened to them, but I do know that we’re not allowed to talk about it per forum rules. In other words, don’t expect any more posts from them.
This is most unfortunate news. I gained a lot of insight from their posts. I hope they do return.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

MotoTrojan wrote: Fri Apr 30, 2021 11:37 am Here is an example comparing three portfolios from 1996 to ~ present:

Port 1 (roughly my port): 20% equally in QVAL, IVAL, DFSVX, VTI, VXUS

Port 2: 20% equally in QVAL, IVAL, DFSVX, MTUM, IMTM

Port 3: 20% equally in QVAL, IVAL, DFSVX, QMOM, IMOM

Shows exactly what I described above, MSCI momentum increased return and reduced overall portfolio risk while Alpha Architect momentum increased Sharpe ratio but resulted in more overall risk.
If it's not too much to ask, could you make a similar comparison for a portfolio with VFMO & IMTM as momentum funds?

If I did this factor regression correctly there seems to be very little difference in the momentum loading between VFMO and MTUM. VFMO seems to have significant negative profitability loading though.
https://www.portfoliovisualizer.com/fac ... sion=false
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Re: Small Cap Value heads Rejoice !!!

Post by Makaveli »

Whenever I check this thread I hope to come across something similar to "US STOCKS CONTINUE TO SOAR" where people make silly/fun comments about US equities rippin'.

Instead I find intense debate :oops:
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Re: Small Cap Value heads Rejoice !!!

Post by jason2459 »

Makaveli wrote: Sat May 01, 2021 8:53 am Whenever I check this thread I hope to come across something similar to "US STOCKS CONTINUE TO SOAR" where people make silly/fun comments about US equities rippin'.

Instead I find intense debate :oops:
Small caps are srs business
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Re: Small Cap Value heads Rejoice !!!

Post by thenextguy »

Makaveli wrote: Sat May 01, 2021 8:53 am Whenever I check this thread I hope to come across something similar to "US STOCKS CONTINUE TO SOAR" where people make silly/fun comments about US equities rippin'.

Instead I find intense debate :oops:
This is the nerd hangout.
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Re: Small Cap Value heads Rejoice !!!

Post by nedsaid »

MotoTrojan wrote: Fri Apr 30, 2021 12:15 pm
vineviz wrote: Fri Apr 30, 2021 12:09 pm Folks who are interested in adding momentum to a SCV portfolio should be sure to evaluate Invesco S&P SmallCap Value with Momentum ETF (XSVM) and Invesco S&P MidCap Value with Momentum ETF (XMVM).

The methodology of these funds means that they don't quite replicate the "go anywhere" style of VFMO or QMOM, but on the other hand they can be used to tune up the momentum exposure without sacrificing the value exposure as a QMOM/QVAL combination sometimes will.
The XSVM ETF itself has changed index MANY times (wouldn't hold it in taxable if I were you) so you can't look at the returns, but I saw a screengrab of the raw index and it was very, very impressive.
This is what I call the Groucho Marx solution, we see a lot index switching by providers, even "stay the course" Vanguard. At Bogleheads, we have evolved or perhaps devolved towards index picking.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

YRT70 wrote: Sat May 01, 2021 4:14 am
MotoTrojan wrote: Fri Apr 30, 2021 11:37 am Here is an example comparing three portfolios from 1996 to ~ present:

Port 1 (roughly my port): 20% equally in QVAL, IVAL, DFSVX, VTI, VXUS

Port 2: 20% equally in QVAL, IVAL, DFSVX, MTUM, IMTM

Port 3: 20% equally in QVAL, IVAL, DFSVX, QMOM, IMOM

Shows exactly what I described above, MSCI momentum increased return and reduced overall portfolio risk while Alpha Architect momentum increased Sharpe ratio but resulted in more overall risk.
If it's not too much to ask, could you make a similar comparison for a portfolio with VFMO & IMTM as momentum funds?

If I did this factor regression correctly there seems to be very little difference in the momentum loading between VFMO and MTUM. VFMO seems to have significant negative profitability loading though.
https://www.portfoliovisualizer.com/fac ... sion=false
No index data for VFMO sadly but I think that would also be a viable combo. I think 2-3 years is too short for a meaningful regression, also results change a lot with daily regression setting. I don't think there is any doubt VFMO loads more on MOM.

This picture may change some after MTUM rebalances next month, but still meaningful. Couldn't fit fund names in screengrab (on Chromebook) but this is top-to-bottom VFMO, QMOM, and MTUM.

Percentiles:

Image

Raw values:

Image

My takeaways:
VFMO is impressively close to QMOM in raw/percentile for 2-12 and 1-6 MOM.

VFMO has similar pricey valuations to MTUM while QMOM is as expensive as you can be.

MTUM has decent 2-12 MOM but (at moment at-least) abysmal 6 month MOM.

So ya, VFMO/IMTM is worth consideration. Also think VFMO/IMOM is a fair replacement for 100% AlphaA mom-funds.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

MotoTrojan wrote: Sat May 01, 2021 11:01 pm No index data for VFMO sadly but I think that would also be a viable combo. I think 2-3 years is too short for a meaningful regression, also results change a lot with daily regression setting. I don't think there is any doubt VFMO loads more on MOM.

This picture may change some after MTUM rebalances next month, but still meaningful. Couldn't fit fund names in screengrab (on Chromebook) but this is top-to-bottom VFMO, QMOM, and MTUM.

Percentiles:

Image

Raw values:

Image

My takeaways:
VFMO is impressively close to QMOM in raw/percentile for 2-12 and 1-6 MOM.

VFMO has similar pricey valuations to MTUM while QMOM is as expensive as you can be.

MTUM has decent 2-12 MOM but (at moment at-least) abysmal 6 month MOM.

So ya, VFMO/IMTM is worth consideration. Also think VFMO/IMOM is a fair replacement for 100% AlphaA mom-funds.
Thank you very much. That's very interesting. So what would you choose and why, MTUM of VFMO for US momentum?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

YRT70 wrote: Sun May 02, 2021 4:19 am
Thank you very much. That's very interesting. So what would you choose and why, MTUM of VFMO for US momentum?
I think it depends on the situation but it does seem hard to justify MTUM when you can get VFMO and still save 2bp. In my particular case I have less robust conviction in MOM and am really just looking for an alternative for global total market funds at 40% to counter-act an aggressive 60% small/deep-value tilt without a significant risk-increase. MTUM/IMTM seem to have done just that with the available post-1996 data, but I don't think the outcome would be vastly different if MTUM was replaced with VFMO. In terms of behavioral impact, it may be valuable to have a large-cap momentum fund on the US side to allow participation in markets favorable to large-growth, when the value side may not be doing so hot (last few years), so that is a consideration even though academically VFMO is likely the superior diversifier.

I think the real conundrum is what to do if you are a die-hard momentum factor believer and were considering going QMOM/IMOM; in that case, I think it would be harder to justify QMOM at 49bp when VFMO is pretty dang close at basically a quarter of the expense. I also really like VFMO's unconstrained rebalancing approach, which should be the best way to handle the handoff from one set of stocks to the latest&greatest momentum.
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Re: Small Cap Value heads Rejoice !!!

Post by james22 »

james22 wrote: Mon Mar 22, 2021 12:03 pmAnyone getting interested in commodity futures again as a complement to SV?

Just added a little VCMDX.
No one?

You can't find a much better complement to ScV than commodities, IMO.

http://raddr-pages.com/research/CommodityFutures.htm
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

MotoTrojan wrote: Sun May 02, 2021 9:33 am
YRT70 wrote: Sun May 02, 2021 4:19 am
Thank you very much. That's very interesting. So what would you choose and why, MTUM of VFMO for US momentum?
I think it depends on the situation but it does seem hard to justify MTUM when you can get VFMO and still save 2bp. In my particular case I have less robust conviction in MOM and am really just looking for an alternative for global total market funds at 40% to counter-act an aggressive 60% small/deep-value tilt without a significant risk-increase. MTUM/IMTM seem to have done just that with the available post-1996 data, but I don't think the outcome would be vastly different if MTUM was replaced with VFMO. In terms of behavioral impact, it may be valuable to have a large-cap momentum fund on the US side to allow participation in markets favorable to large-growth, when the value side may not be doing so hot (last few years), so that is a consideration even though academically VFMO is likely the superior diversifier.

I think the real conundrum is what to do if you are a die-hard momentum factor believer and were considering going QMOM/IMOM; in that case, I think it would be harder to justify QMOM at 49bp when VFMO is pretty dang close at basically a quarter of the expense. I also really like VFMO's unconstrained rebalancing approach, which should be the best way to handle the handoff from one set of stocks to the latest&greatest momentum.
Thank you. That makes sense. I'm now leaning towards VFMO + IMTM.

I'm going to wait for the RR podcast with Robert Novy Marx though. I think he may give arguments in favour of using multifactor funds. I think the episode airs this week.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

YRT70 wrote: Mon May 03, 2021 7:41 am
MotoTrojan wrote: Sun May 02, 2021 9:33 am
YRT70 wrote: Sun May 02, 2021 4:19 am
Thank you very much. That's very interesting. So what would you choose and why, MTUM of VFMO for US momentum?
I think it depends on the situation but it does seem hard to justify MTUM when you can get VFMO and still save 2bp. In my particular case I have less robust conviction in MOM and am really just looking for an alternative for global total market funds at 40% to counter-act an aggressive 60% small/deep-value tilt without a significant risk-increase. MTUM/IMTM seem to have done just that with the available post-1996 data, but I don't think the outcome would be vastly different if MTUM was replaced with VFMO. In terms of behavioral impact, it may be valuable to have a large-cap momentum fund on the US side to allow participation in markets favorable to large-growth, when the value side may not be doing so hot (last few years), so that is a consideration even though academically VFMO is likely the superior diversifier.

I think the real conundrum is what to do if you are a die-hard momentum factor believer and were considering going QMOM/IMOM; in that case, I think it would be harder to justify QMOM at 49bp when VFMO is pretty dang close at basically a quarter of the expense. I also really like VFMO's unconstrained rebalancing approach, which should be the best way to handle the handoff from one set of stocks to the latest&greatest momentum.
Thank you. That makes sense. I'm now leaning towards VFMO + IMTM.

I'm going to wait for the RR podcast with Robert Novy Marx though. I think he may give arguments in favour of using multifactor funds. I think the episode airs this week.
I am also looking forward to that listen. I also think I may be leaning in a similar position of favoring VFMO/IMTM; VFMO tilts smaller but still has large-cap exposure so not totally doing away with that asset class. Looking at the sector makeup between them today you can see how much better of a job VFMO did of rotating to today's-momentum. You can also see this in the YTD returns :twisted:.
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Re: Small Cap Value heads Rejoice !!!

Post by james22 »

We expect value to outperform growth over the next ten years by five to seven percentage points, annualized, and perhaps by an even wider margin over the next five years.

https://investornews.vanguard/why-u-s-v ... rm-growth/
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Re: Small Cap Value heads Rejoice !!!

Post by RovenSkyfall »

Is anybody rejoicing?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

So I have spent some time on the Rational Reminder forum, really awesome place with lots of great factor discussion. The most wild take-away though is that it seems like a vast majority of the people are not only in deep-factor tilts (50-100% small-value or momentum) but are also leveraging that 1.5-2x, and even 2.5-3x in some cases via non-callable loans, margin etc...

Bold group! Makes most of us seem pretty wimpy.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

So I have spent some time on the Rational Reminder forum, really awesome place with lots of great factor discussion. The most wild take-away though is that it seems like a vast majority of the people are not only in deep-factor tilts (50-100% small-value or momentum) but are also leveraging that 1.5-2x, and even 2.5-3x in some cases via non-callable loans, margin etc...

Bold group! Makes most of us seem pretty wimpy.
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Re: Small Cap Value heads Rejoice !!!

Post by RovenSkyfall »

MotoTrojan wrote: Mon May 03, 2021 3:12 pm So I have spent some time on the Rational Reminder forum, really awesome place with lots of great factor discussion. The most wild take-away though is that it seems like a vast majority of the people are not only in deep-factor tilts (50-100% small-value or momentum) but are also leveraging that 1.5-2x, and even 2.5-3x in some cases via non-callable loans, margin etc...

Bold group! Makes most of us seem pretty wimpy.
Would be interesting to see what the distribution of outcomes is for a 2x or 3x leverage of SCV. It looks terrible for long term hold of leveraged SP500 which has less volatility, so I would guess it is much worse for SCV (although the arithmetic mean is better).
Here is the distribution of outcomes for investing in the S&P500 with a 0.1% expense ratio:
Image

And here with a 2x leveraged ETF:
Image

And here with a 3x leveraged ETF:
Image
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

RovenSkyfall wrote: Tue May 04, 2021 8:27 am
MotoTrojan wrote: Mon May 03, 2021 3:12 pm So I have spent some time on the Rational Reminder forum, really awesome place with lots of great factor discussion. The most wild take-away though is that it seems like a vast majority of the people are not only in deep-factor tilts (50-100% small-value or momentum) but are also leveraging that 1.5-2x, and even 2.5-3x in some cases via non-callable loans, margin etc...

Bold group! Makes most of us seem pretty wimpy.
Would be interesting to see what the distribution of outcomes is for a 2x or 3x leverage of SCV. It looks terrible for long term hold of leveraged SP500 which has less volatility, so I would guess it is much worse for SCV (although the arithmetic mean is better).
Here is the distribution of outcomes for investing in the S&P500 with a 0.1% expense ratio:
Image

And here with a 2x leveraged ETF:
Image

And here with a 3x leveraged ETF:
Image
Adding momentum helps, but overall volatility and drawdown for most of their portfolios is still higher than S&P500.

Wes Gray uses his 4 ETFs at 150% leverage but with a -50% short on global beta (so net 100%), plus adds trend-following; that is a pretty interesting approach I think. Not sure I would want the trend, but the 150/-50 alone would be interesting.
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Re: Small Cap Value heads Rejoice !!!

Post by Nathan Drake »

SCV is already risky enough...not sure id want to leverage on top of it
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Re: Small Cap Value heads Rejoice !!!

Post by RovenSkyfall »

Nathan Drake wrote: Tue May 04, 2021 10:48 am SCV is already risky enough...not sure id want to leverage on top of it
Those charts are from this article: https://www.gordoni.com/effective-altru ... -etfs.html

Ultimately the conclusion was:
Based on the previous two sections mathematically speaking a 3X leveraged ETF, such as UPRO, currently has a small advantage over 1X or 2X for effective altruism purposes, but it may be wise to use a 2X leveraged ETF, such as SSO, owing to the significantly reduced downside of doing so. Investing in the 2X ETF would probably make it slightly easier to sleep at night. That said, both options are only just superior, or significantly inferior to investing in small cap value, depending on whether there are persistent small and value performance anomalies.
It would seem that SCV is just fine with likely better probability density functions.
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Re: Small Cap Value heads Rejoice !!!

Post by RovenSkyfall »

MotoTrojan wrote: Tue May 04, 2021 10:22 am Adding momentum helps, but overall volatility and drawdown for most of their portfolios is still higher than S&P500.

Wes Gray uses his 4 ETFs at 150% leverage but with a -50% short on global beta (so net 100%), plus adds trend-following; that is a pretty interesting approach I think. Not sure I would want the trend, but the 150/-50 alone would be interesting.
Whats the point of the -50% short?

Can you link the post where people are doing a 2x or 3x version? Want to make sure they have seen those probability curves. 2x or 3x SCV is even riskier than HFEA which fits somewhere around 1.6 based on beta and those probability curves.
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Re: Small Cap Value heads Rejoice !!!

Post by thenextguy »

Value is actually holding up fairly well today.
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Re: Small Cap Value heads Rejoice !!!

Post by Anon9001 »

I think for any factor tilt to make a difference you need a minimum 50% tilt as most factor funds are long only so they are loading on Beta in addition to factors they say they are targeting. If you are doing less than this it is pointless. I recommend for SCV believers to have 50% VT 25% AVDV 25% AVUV portfolio. A simple three fund portfolio with factor exposure. It is un-necessary to over-complicate things beyond this.
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