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

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Wednesday September 1, 2021. 

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.

Smart Factor ETFs Review

Smart factor ETFs have become more mature and they are now widely used. In this newsletter, we review some key smart factor ETFs and a portfolio that uses these ETFs as candidate funds. 

Main smart factor ETFs

We have discussed smart factor ETFs in several newsletters:

Specifically, the following are the main ETFs we are interested in:

  • Momentum ETF: MTUM
  • Growth ETF: VUG
  • Value ETF: VTV
  • Quality ETF: QUAL
  • Low volatility ETF: USMV

The following table shows the latest returns of these ETFs:

Smart factor ETF performance (as of 8/13/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
MTUM (iShares MSCI USA Momentum Factor) 11.5% 26.7% 18.2% 19.7%    
VUG (Vanguard Growth ETF) 18.4% 34.7% 25.5% 22.8% 19.1% 13.8%
VTV (Vanguard Value ETF) 20.8% 36.2% 12.6% 13.0% 14.2% 8.6%
QUAL (iShares Edge MSCI USA Quality Factor ETF) 20.7% 35.9% 19.2% 17.3%    
USMV (iShares MSCI USA Minimum Volatility) 14.0% 21.7% 13.8% 12.7%    
SPY (SPDR S&P 500 ETF) 20.1% 34.4% 18.6% 17.5% 16.5% 10.9%

One can see that for the past 5 years, low volatility (USMV) and value (VTV) underperformed S&P 500 (SPY) while quality (QUAL) matched and growth (VUG) and momentum (MTUM) outperformed. This is somewhat expected in this growth driven bull market: more risk averse ETFs such as low volatility and value are not in favor. On the other hand, quality ETF closely matched SPY.

In our opinion, quality stocks or companies should serve well in both value and growth driven cycles. If one wants to buy and hold ‘good’ companies in a long term (20 years or longer), a quality factor highly diversified index fund like QUAL should be as good as or better than a general index like S&P 500. In the following chart and table from MSCI we see that MSCI USA Quality Index (QUAL tracks) has outperformed general index MSCI USA (that has a similar return as other major indexes such as S&P 500) by some good margin. 

Smart factor ETF rotation portfolio

On the other hand, we can do even better if we adopts a good tactical momentum driven rotation strategy. Portfolio P Composite Momentum Scoring Factor ETFs, listed on Advanced Strategies, uses our composite momentum scoring algorithm to select the top performing ETF among the smart factor ETFs every month. It also uses our composite market indicator to decide whether to invest in a Treasury fund instead if stock markets are in a downtrend. 

The following table shows its latest returns:

Portfolio Performance Comparison (as of 8/13/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 2020 Max Drawdown
P Composite Momentum Scoring Factor ETFs 20.3% 36.6% 18.2% 20.1% 18.6% 12%
MTUM (iShares MSCI USA Momentum Factor) 11.5% 26.7% 18.2% 19.7%   34%
VUG (Vanguard Growth ETF) 18.4% 34.7% 25.5% 22.8% 19.1% 32%
VTV (Vanguard Value ETF) 20.8% 36.2% 12.6% 13.0% 14.2% 37%
QUAL (iShares Edge MSCI USA Quality Factor ETF) 20.7% 35.9% 19.2% 17.3%   34%
USMV (iShares MSCI USA Minimum Volatility) 14.0% 21.7% 13.8% 12.7%   33%
SPY (SPDR S&P 500 ETF) 20.1% 34.4% 18.6% 17.5% 16.5% 34%


  • The portfolio has done well for the past 10 years and more. Its trailing 10 year annualized return is just a bit lower than the best performing ETF VUG’s. This is expected as for the past 10 years, growth stocks have been exceptionally strong. 
  • However, we expect in the coming years, the portfolio will outperform these ETFs by even bigger margins. This is because we believe we are at the end of the current secular stock bull market/cycle (see June 28, 2021: Resuming Growth Trends Chaotically? and July 12, 2021: The Long Forgotten Bear Market Cycles). Once a big downturn hits, our portfolio will help to reduce loss and better preserve capital, which will even translate into better returns. 
  • The above risk reduction was demonstrated in the short sharp 2020 downturn: its maximum drawdown was about 1/3 of the rest ETFs. Though that downturn was too brief and it might become a distant memory for most people, we do believe it’s not unlikely to see a meaningful and much longer downturn ahead. 
  • This portfolio also demonstrates our investment philosophy: we want our investment portfolios achieve comparable returns during a bull market while doing much better in a bear market. As time goes, we’ll see whether this goal is attainable. 

Finally, we want to compare our portfolio with several multi-factor ETFs and the equal weighted smart portfolio discussed in Otober 28, 2019: Multi-factor ETFs vs. Equal Weight Multi-Factor Portfolios

Portfolio Performance Comparison (as of 8/16/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
P Composite Momentum Scoring Factor ETFs 20.3% 36.6% 18.2% 20.1% 18.6%
Multi-factor Value Momentum Quality Low Volatility 17.3% 31.0% 16.0% 15.7%  
GSLC (Goldman Sachs ActiveBeta US LgCp Eq ETF) 19.3% 33.5% 18.1% 17.1%  
USMC (Principal US Mega-Cap Multifactor ETF) 17.7% 31.0% 17.4%    
VTI (Vanguard Total Stock Market ETF) 19.0% 36.6% 18.6% 17.7% 16.5%

Again, our rotation portfolio has done better than the two largest multi-factor ETFs (GSLC and USMC). It’s also interesting to see that the two multi-factor ETFs did better than the equal weighted portfolio. That indicates at least for the past 5 years, the two actively managed multi-factor ETFs add extra value by overweighting/underweighting certain factors. 

Market Overview

We have to say that the earnings growth story is indeed impressive: now that 91% of S&P 500 companies have reported actual Q2 earnings by last Friday, the blended earnings growth rates of the S&P 500 companies for the past several weeks are 89.3%, 88.8%, 85.1%, 74.2%, 69.3% and 63.3% expected on June 30, 2021 (see Factset). So company managements managed expectation well and showed very strong earnings surprises in aggregate. No wonder large stock indexes like S&P 500 and Nasdaq 100 have been making all time highs day after day. 

But we do want to remind our readers that not all stocks are rosy. In fact, both small and mid cap stock indexes are no where near their all time highs. Geopolitically, the chaotic US withdrawal from Afghan is adding some possible uncertainty if the situation over there is getting out of hand. 

We reiterate our caution on the current markets and advocate the following practice:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation is still extremely high by historical standard. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that 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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