Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, November 18, 2019. You can also find the re-balance calendar for 2019 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Multi-factor ETFs: Value And Momentum

We have so far introduced most of stock factors that have shown long term outperformance over popular capitalization weighted broad base stock indexes such as S&P 500. These factors include quality, momentum, value and low volatility. ETFs based on these factors have become more popular and some of them have commanded enough liquidity to be used in portfolios. Interested readers can refer to our previous newsletters on these subjects. 

Along with these factor ETFs, attempts have been made to construct ETFs that consist of multiple factors. The thinking is that these multi-factor ETFs can even make it easier for investors to construct a portfolio without being bothered with individual factor ETFs. 

In this newsletter, we first look at how ETFs with two main factors value and momentum  have performed, compared with a portfolio with simple equal weighted factor ETFs. 

Value and Momentum

There have been many academic studies on the factors of value and momentum. Value and momentum factors are probably the oldest and the most popular factors. Furthermore, as these two factors seem to sit on two extremes: value represents fundamental of a business while momentum represents the technical behavior of a stock, it’s very natural to try to combine these two factors. 

There are numerous ways to combine these two factors. The simplest way, of course, is to just construct a portfolio of two equal parts: half of it is a value portfolio and the other half is a momentum portfolio. Other ways include: 

  • S&P 500 High Momentum Value Index (for ETF SPVM): it first ranked 500 stocks with their value scores. It then selects only 200 top ‘value’ stocks and then it selects 100 stocks with the highest momentum scores from these 200 stocks. So this index would be really a value stocks with momentum. 
  • MSCI Select Value Momentum Blend Index (for ETF ULVM): it uses a composite value-momentum score methodology. In this way, stocks that score well on one measure only, for example a relatively cheap stock that is falling in price, are less likely to be included in the index.
  • Other methods like employ hedging (for ETF VMOT and VAMO): unfortunately, these methods have very unstable returns, as we will see shortly. 

The following two charts show the performance of the above two value-momentum indexes (S&P and MSCI):

S&P 500 High Momentum Value Index: 


MSCI Select Value Momentum Blend Index:


Both indexes have outperformed their benchmarks. Their historical returns are comparable. 

Value Momentum ETFs

 The following table compares the ETFs mentioned above: 

Value Momentum ETF Performance Comparison (as of 10/21/2019):
ETF AUM(Expense) YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe
Value VTV and Momentum MTUM   18.3% 9.1% 14.9% 12.3% 0.86
SPVM (Invesco S&P 500 Value with Momentum ETF) $52 M (0.39%) 20.1% 9.0% 11.6% 9.1% 0.62
ULVM (VictoryShares USAA MSCI USA Value Momentum ETF) $479 M (0.2%) 15.4% 4.1%      
VMOT (Alpha Architect Value Momentum Trend ETF) $79 M (0.8%) -1.7% -10.4%      
VAMO (Cambria Value Momentum ETF) $14 M (0.64%) -6.4% -13.2% -3.2%    
VTI (Vanguard Total Stock Market ETF) $124 B (0.03%) 21.2% 10.1% 13.7% 10.9% 0.79

 A few comments: 

  • All of these ETFs have low AUM (Asset Under Management). The largest ULVM only amassed half billion. Again, in general, we would prefer investing ETFs with at least $1 Billion AUM to ensure liquidity. 
  • They are all expensive. Only ULVM’s expense 0.2% seems reasonable. 
  • Note: SPVM only switched to S&P 500 High Momentum Value Index in June this year. So its historical performance is not very meaningful. 
  • The returns of SPVM and ULVM are somewhat inconclusive at the moment, given their very short history. 
  • Portfolio Value VTV and Momentum MTUM (highlighted) consists of equal weight value VTV ETF and Momentum MTUM ETF. Both ETFs have high AUM (VTV: $50 B, MTUM $9B) and low expense ratios (VTV: 0.04%, MTUM: 0.15%). This portfolio has outperformed all of the value momentum ETFs by some large margins. 

The apparent conclusion at the moment is that it might be cheaper, better and more flexible to just simply invest in individual ETFs instead of looking for a combined ‘optimal’ ETF. It does seem that the maxim ‘the simpler, the better’ applies here. In the next newsletter, we will look at how to combine more factors together. 

Market overview

As the earnings reports continued to pour in, analysts continued to manage down earnings expectation. As of last Friday, Factset now sees -4.7% year over year earnings decline for S&P 500 companies (from -0.6% on 4/30 to -4% on 9/30, two weeks ago -4.6%). Furthermore, net profit margin probably declined in the three consecutive quarters. Most companies did manage to beat the revised down expectation and so far, profits have not declined dramatically. We have no strong conviction one way or the other. However, considering the extended stock valuation and the extended bull market, we believe it’s prudent to keep an eye on risk. 

For more detailed asset trend scores, please refer to 360° Market Overview

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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