Multi-Factor ETFs And Rotation
Previously we devoted several newsletters on factor ETFs and multi-factor ETFs as we believe key stock factors can indeed improve long term returns over a vanilla market capitalization based stock index such as S&P 500 index (SPY). Specifically, we believe the following four factors can be used to construct a better US stock portfolio (again, over a broad base index such as S&P 500):
- Value factor: invest stocks with lower valuation (i.e. cheaper)
- Momentum factor: invest stocks with high price momentum
- Quality factor: invest stocks with high quality (i.e. consistent profit) underlying business
- Low Volatility factor: invest stocks with lower overall portfolio volatility when put together
Note: low volatility factor does NOT simply mean picking stocks with low volatility, instead, it’s to choose stocks to form a portfolio with low volatility. See October 14, 2019: Low Volatility Factor ETFs.
See, for example, October 28, 2019: Multi-factor ETFs vs. Equal Weight Multi-Factor Portfolios for more details on these four factors.
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