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.

Factor ETF Rotation

We have featured several newsletters in the past several months on factor ETFs. In last week’s newsletter, we featured a multi-factor allocation portfolio that shows a great promise to utilize these ETFs in portfolio construction.

In this newsletter, we show that a simple momentum based rotation among these factor ETFs can even better the static multi-factor allocation portfolio. 

Factor ETF Rotation

In the following table, we compare the returns of momentum based rotation portfolio P Momentum Scoring Factor ETFs Momentum Value Low Volatility Quality with the static multi-factor allocation portfolio Multi-factor Value Momentum Quality Low Volatility

The rotation portfolio uses the following four factor ETFs that are present in the static portfolio: 

Value VTV (Vanguard Value ETF)
Momentum MTUM (iShares MSCI USA Momentum Factor)
Quality QUAL (iShares Edge MSCI USA Quality Factor ETF)
LowVol USMV (iShares MSCI USA Minimum Volatility)

At the end of each month, the portfolio evaluates each candidate fund’s momentum and then selects the one with the highest momentum score to invest. The returns are as follows: 

Portfolio Performance Comparison (as of 11/1/2019): 
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe AR Since 7/19/2013
P Momentum Scoring Factor ETFs Momentum Value Low Volatility Quality 23.2% 18.4% 21.0% 15.7% 1.11 15.7%
Multi-factor Value Momentum Quality Low Volatility 22.3% 14.1% 15.7% 11.8% 0.88 12.7%
VFINX (Vanguard 500 Index Investor) 24.2% 14.1% 15.4% 10.8% 0.75 12%

AR: Annualized Returns

Five year comparison chart: 

The 3-4% extra annualized return is impressive. However, we have to point out that the above 4 factor ETFs are mostly from large cap stocks. As large cap stocks have gone on a multi-year outperformance run so far, we feel the size and dividend factors will probably outperform in some future of time. We will monitor markets and decide whether we will add these factor ETFs to the candidate list. 

Factor vs. style ETFs

A natural question arises: how are ’smart’ factor ETFs compared with the traditional nine style ETFs, namely, large cap growth, large blend, large cap value, mid cap growth, mid cap blend, mid-cap value, small cap growth, small cap blend and small cap value?

The following table compares the returns of these portfolios:

Portfolio Performance Comparison
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR Since 7/18/2013 10Yr AR 15Yr AR
P Momentum Scoring Factor ETFs Momentum Value Low Volatility Quality 22.4% 17.7% 21.1% 15.5% 15.7%  N/A  N/A
P Momentum Scoring Style ETFs 24.5% 13.3% 15.1% 9.1% 10.2% 13.5% 8.7%
P Momentum Scoring Style ETFs Top 1 26.0% 13.7% 15.5% 10.7% 11.7% 14.7% 9.3%
VFINX (Vanguard 500 Index Investor) 24.2% 14.1% 15.4% 10.8% 12% 13.6% 9.0%

In the above, P Momentum Scoring Style ETFs chooses top two performing style ETFs each month while P Momentum Scoring Style ETFs Top 1 chooses top one ETF. The outperformance by factor ETF portfolio is even more glaring: it’s 15.5% of five year AR (Annualized Return) is almost 5% more than that of the top 1 style ETF portfolio. Though we have to point out the returns of the style ETF rotation portfolios are somewhat impacted by the underperformance of small cap stocks, the return difference is just large enough to show factor ETF rotation would be very competitive, at least. 

To tie everything we have discussed so far on factor ETFs, we have shown that several factor ETFs have strong backing of intuition, historical performance data and academic research results. These factors include value, quality, momentum and low volatility. Small cap stocks (size) and dividend factor (especially dividend appreciation factor) are tow additional such factors. We believe that these factor based ETFs can be a good candidate list to build a static or rotation based portfolio. We will start to add these portfolios to our monitored/recommended list in the future. 

Market overview

Markets continued to be buoyed by better than expected earnings results and trade negotiation progress news. As of last Friday, Factset shows that the blended earnings decline of S&P 500 for Q3 2019 is -2.7%, better than even last week’s -3.7%. Furthermore, it looks like it’s increasingly likely the trade negotiation with China will reach to a more amenable result that at least will give businesses some certainty in the near future. At the moment, investors seem to forget or have shown little concern on stock expensiveness and continue to push stocks to new highs. However, one should be at least constantly aware that stock valuation has reached a very expensive (if not the most expensive) level. Though high valuation does not automatically translate into immediate market decline, but this is a significant factor that usually determines the long term future returns. As always, stay the course that’s consistent with your personal risk tolerance. 

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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