Factor Investing: Costs Do Matter

Progress in science comes when experiment contradicts theory. – Richard Feynman One of the tenets of modern portfolio theory is that you cannot generally beat the market after transaction costs. Yet academic researchers have shown that momentum consistently beats the market. Other factors besides momentum have also cast doubt on the efficacy of the efficient…

Real Time Factor Performance

According to S&P DJ Indices, 92% of all actively managed stock funds failed to beat their benchmarks over the past 15 years. This should come as no surprise. Similar results were published more than 20 years ago. This information has caused a move away from active stock selection and toward index funds and systematic approaches.…

Factor Zoo or Unicorn Ranch?

According to Morningstar, as of June 2016, the assets in smart beta exchange-traded products totaled $490 billion. BlackRock forecasts smart beta investing using size, value, quality, momentum, and low-volatility factors will reach $1 trillion by 2020 and $2.4 trillion by 2025. This annual growth rate of 19% is double the growth rate of the entire…

Factor Investing: Buyers Beware

A highlight of the 2016 Morningstar ETF Conference was the keynote address by the former leader of U.S. Navy Seal Team Six, Rob O’Neill. Chief O’Neill shared some stories about his training and operations as an elite Navy Seal. The take away lessons from his talk were the importance of preparation, discipline, and keeping the mission goal…

Multi-Factor Investing

Multi-factor investing that combines value, momentum, quality (profitability), or low volatility factors is today’s hot new investment approach. There has been an explosion of multi-factor ETFs recently with eleven of the sixteen existing U.S. multi-factor funds coming to market this year and five of them showing up within the past 60 days. But multi-factor funds…

Value and Momentum Revisited

Most academic research on momentum deals with individual stocks. Most applications of momentum are also oriented toward individual stocks. The three largest momentum programs (AQR momentum mutual funds, PowerShares DWA Momentum ETFs, and iShares MSCI USA Momentum Factor ETF) all use individual stock momentum. The only public program using momentum applied to asset classes was…