December 14, 2020: Style and Factor ETFs Portfolio Reviews

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 Monday January 4, 2021.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month.

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.

Holiday schedule

We will not publish newsletters on 12/21 and 12/28 because of holiday schedule. We will resume our publication on 1/4/2020.

We wish everyone a joyful holiday and happy New Year! Stay safe and healthy!

Style and Factor ETFs Portfolio Reviews

We feature two main advanced portfolios that are based on stock styles and factors. In this newsletter, we review these portfolios.

Styles and smart factors

The classic nine stock styles essentially involve size (large, mid, small) and valuation (growth, blend and value). The size and valuation are also called factors. Basically, if you combine the two factors’ values, you’ll end up with 3×3=9 combinations. The following are the nine old Russell style ETFs (and their trend scores):

US Equity Style Trend (as of 12/11/2020):

Description	Symbol	52 Weeks	Trend Score
Russell Largecap Growth	IWF	36.16%	14.89%
Russell Largecap Index	IWB	20.02%	11.69%
Russell Largecap Value	IWD	3.05%	8.07%
Russell Midcap Growth	IWP	33.52%	18.68%
Russell Midcap Indedx	IWR	16.34%	13.47%
Russell Midcap Value	IWS	4.84%	10.1%
Russell Smallcap Growth	IWO	31.19%	22.12%
Russell Smallcap Index	IWM	18.23%	19.15%
Russell Smallcap Value	IWN	4.32%	15.62%

In the past 10 years, some new factors were developed. Among them, the so called ‘smart factors’ (see September 16, 2019: Factor ETFs). The MSCI shows the following factors:

Notice in the above, MSCI added GROWTH as a new factor to its 2019’s webpage. Of course, growth has been a fundamental factor in the classic 9 factors. Our guess is that growth stocks have done so much better that MSCI (and other institutions) would like to emphasize it to their customers.

Investors are often confused between GROWTH and MOMENTUM factors. Though the two often produce some same stocks, they are different. Growth factor is more on a company’s earnings (and revenue) momentum while Momentum factor is completely based on stock market prices.

The following table shows the returns of the four main factor ETFs:

Portfolio Performance Comparison (as of 12/14/2020):

Ticker/Portfolio Name	YTD Return**	1Yr AR	3Yr AR	5Yr AR
VTV (Vanguard Value ETF)	1.0%	3.4%	6.6%	10.9%
MTUM (iShares MSCI USA Momentum Factor)	25.8%	28.5%	16.5%	18.3%
QUAL (iShares Edge MSCI USA Quality Factor ETF)	14.3%	17.1%	13.0%	14.1%
USMV (iShares MSCI USA Minimum Volatility)	3.5%	5.6%	10.3%	12.5%
GSLC (Goldman Sachs ActiveBeta US LgCp Eq ETF)	15.3%	18.4%	13.4%	14.3%
LRGF (iShares Edge MSCI Multifactor USA ETF)	7.4%	10.0%	6.9%	11.2%
SPY (SPDR S&P 500 ETF)	15.0%	17.2%	13.1%	14.4%

Of course, the momentum ETF MTUM has outperformed others by some big margins because of the current raging bull market.

Performance of style and factor ETF momentum portfolios

Let’s take a look at the latest performance of the two portfolios listed on Advanced Strategies:

Portfolio Performance Comparison (as of 12/14/2020):

Ticker/Portfolio Name	YTD Return**	1Yr AR	3Yr AR	5Yr AR	10Yr AR	Max Drawdown 10 Yr
P Composite Momentum Scoring Factor ETFs	19.3%	21.3%	14.2%	18.9%	15.5%	21
P Composite Momentum Scoring Style ETFs	25.6%	28.1%	17.2%	18.5%	14.1%	22.8
SPY (SPDR S&P 500 ETF)	15.0%	17.2%	13.1%	14.4%	13.6%	33.7

A few observations:

Both style and factor ETF portfolios have done better than SPY for the past 1, 3, 5 and 10 year timeframes.
They did that with smaller maximum drawdown mainly because of their avoidance of stocks from March to April this year.
For the style ETF portfolio that has longer history, it did even better in terms of maximum drawdown. In 2008-2009, SPY incurred more than 55% drawdown while the portfolio had around 9% maximum drawdown in that time.
The style ETF portfolio correctly picked large growth ETF in recent years while the factor ETF portfolio selected MTUM, both are the key contributors to their outperformance.

Adding Growth ETF

As we stated above, growth factor differs from momentum factor even though they often produce same or similar stocks. We tested it out a new portfolio that includes P Composite Momentum Scoring Factor ETFs With VUG Vanguard growth ETF VUG in its candidate list (in addition to the 4 ETFs listed above):

Portfolio Performance Comparison (as 12/14/2020):

Ticker/Portfolio Name	YTD Return**	1Yr AR	3Yr AR	5Yr AR	10Yr AR	Since 1/1/2008
P Composite Momentum Scoring Factor ETFs With VUG	26.9%	30.0%	16.4%	19.7%	14.4%	14.2%
P Composite Momentum Scoring Factor ETFs	19.3%	21.3%	14.2%	18.9%	15.5%	14.9%
SPY (SPDR S&P 500 ETF)	15.0%	17.2%	13.1%	14.4%	13.6%	9.6%

It’s interesting to see that the new portfolio didn’t produce better results than the old one. In fact, it slightly underperformed. This tells us two things: 1). our momentum algorithm is not monotonic, i.e., it does not necessarily perform better when more candidate funds are added. Quite the opposite, many times the performance can deteriorate, 2). some candidate funds are overlapped and it’s better off to use a minimal set. In this case, as we can see, VUG and MTUM have performed comparably:

To summarize, the style and factor ETF momentum portfolios can outperform market benchmarks such as S&P 500 index. However, care should be given when choosing candidate funds. As there are more and more new ETFs coming to market, this is an important point to remember when constructing a momentum portfolio.

Market overview

It’s saddening to see that the pandemic becomes worse every day. Even though now UK and US have started to deploy vaccines, we should be aware that this is an enormously large endeavor and it will take time. Currently, the consensus seems to be: A). the peak of hospitalization and death of the pandemic will probably be reached in mid January. B). the pandemic will probably be mostly controlled by the summer of 2021. The following is the IHME’s projection:

In the meantime, economy might still suffer greatly. Considering the current over-stretched over-valued markets, we believe investors shouldn’t be complacent and should adopt risk managed investment strategies. For MyPlanIQ users, we should follow our strategies to navigate through this period:

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 now reached another high. 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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