anyone doing factor investing???

[NYC_Squirrel]

Hello,

I'm trying to rebalance/gain some factor exposures in my 401k portfolio, but I keep rewatcing Ben Felix's youtube videos and keep second guessing myself. 

just curious, how much of a tilt do you have in your portfolio? what funds do you use to gain that exposure?

thanks.

[MustacheAndaHalf]

For many years, tech companies have done extraordinarily well.  Those companies are concentrated in the large/growth segment of the market, which means small/value exposures miss out.  I gave up on small/value several years ago, despite Larry Swedroe (who I like) advocating for it.  The 3-factor CAPM model was the market factor, small vs large cap, and value vs growth.

His books also mention the momentum factor, which is the new factor in the 4-factor CAPM model.  I read that it succeeds in 4 out of 5 years, and is more significant than small/value.  My index fund holds are tilted towards momentum.

(There's a 5-factor model that doesn't use momentum, but instead has quality and investability.  The 5-factor model apparently explains Buffet's returns, although without the leverage Buffet uses)

[NYC_Squirrel]

thanks,

how do you mitigate the transactional cost of momentum factor? Or do you think that the overall return justifies the cost???

I'm trying to tilt my portfolio towards just small and value factors just for starters, but not sure if there's such a thing as "ideal" allocation to them.

any reason why you gave up on small/value several years ago???

[MustacheAndaHalf]

I gave up on small/value because I felt even if it will beat the market in the long-term, I might not want to wait long enough for that to happen.  One caveat on that: last year small/value took a significant hit from Covid-19, so I bought it to profit off the recovery.  That's done really well, but I expect to sell this year.

I switched to momentum years ago when I got annoyed with people performance chasing.  Momentum takes advantage of that, riding on the way up, but then switching in a disciplined way.  You can compare after-tax returns posted for momentum funds versus total stock market funds to decide if it's worth it - I think so.

How does your 401(k) allow you to factor tilt?  Does it have small/value choices, or does it offer the freedom to pick any ETF you want?

[NYC_Squirrel]

yeah, I took the plunged last year and started to shift from a 100% VTSAX to small/value tilt during covid 19, but only 6% position each in VSIAX/VVIAX.

I will definitely look into momentum funds now, thanks for putting it on my radar.

unfortunately my 401k is pretty limited, so I try to tilt as best as i can. my 401k offers VIIIX, VEMPX, VWNAX, and some other pacific funds that are just costly, but my logic is that:

Mix of VIIIX/VEMPX at 70/30 to gain beta factor
VEMPX to gain additional exposure to small caps
VWNAX to gain value tilt

It's not ideal, but it's what I can work with. And lastly, I supplement that with VTSAX/VSIAX/VVIAX in my IRA/ROTH to balance it all out....again not ideal

[Steeze]

Current position is:

30% total us
10% SCV
10% (VGT, VHT, ARKK)
17.5% Dev. Ex-us
17.5% EM
5% REIT
5% total Bond
5% cash

Last year I was:

40% total us
15% dev. Ex us
15% EM
10% REIT
10% Bonds
10% cash

[MustacheAndaHalf]

Mix of VIIIX/VEMPX at 70/30 to gain beta factor
VEMPX to gain additional exposure to small caps
VWNAX to gain value tilt

On morningstar's portfolio tab, you can switch the "Style" to market-weight, and view the percentages of micro/small/mid/large/giant cap companies.  I lump "giant" into large-cap, and micro-cap into small-cap:
VIIIX is 84% large cap / 16% mid-cap / 0% small cap
https://www.morningstar.com/funds/xnas/viiix/portfolio
VEMPX is 15% large (!) / 37% mid-cap / 48% small cap
https://www.morningstar.com/funds/xnas/vempx/portfolio

With a 70/30 blend, that gives:
64% large / 22% mid / 14% small

For comparison, the U.S. total stock market (VSMPX) holds:
VSMPX is 72% large cap / 20% mid cap / 9% small cap
https://www.morningstar.com/funds/xnas/vsmpx/portfolio

Current position is:

30% total us
10% SCV
10% (VGT, VHT, ARKK)
17.5% Dev. Ex-us
17.5% EM
5% REIT
5% total Bond
5% cash

You have a lot of Vanguard funds, so one warning: Vanguard Small-Cap Value (VBR) has a relatively weak tilt to small cap and value.  It holds 34% mid-cap stocks, for example, and only 11% are micro-caps.
https://www.morningstar.com/etfs/arcx/vbr/portfolio

Vanguard lets you buy stocks and non-Vanguard ETFs for $0/trade, so there's no fee to switch to outside ETFs.  I used to hold SPDR S&P 600 Small Cap Value ETF (SLYV), since it has only 1% mid-caps and 60% micro-cap stocks.
https://www.morningstar.com/etfs/arcx/slyv/portfolio

Do you rebalance between SCV and VGT?  They seem like opposites, and I wonder if that's good for rebalancing.

[Steeze]

Mix of VIIIX/VEMPX at 70/30 to gain beta factor
VEMPX to gain additional exposure to small caps
VWNAX to gain value tilt

On morningstar's portfolio tab, you can switch the "Style" to market-weight, and view the percentages of micro/small/mid/large/giant cap companies.  I lump "giant" into large-cap, and micro-cap into small-cap:
VIIIX is 84% large cap / 16% mid-cap / 0% small cap
https://www.morningstar.com/funds/xnas/viiix/portfolio
VEMPX is 15% large (!) / 37% mid-cap / 48% small cap
https://www.morningstar.com/funds/xnas/vempx/portfolio

With a 70/30 blend, that gives:
64% large / 22% mid / 14% small

For comparison, the U.S. total stock market (VSMPX) holds:
VSMPX is 72% large cap / 20% mid cap / 9% small cap
https://www.morningstar.com/funds/xnas/vsmpx/portfolio

Current position is:

30% total us
10% SCV
10% (VGT, VHT, ARKK)
17.5% Dev. Ex-us
17.5% EM
5% REIT
5% total Bond
5% cash

You have a lot of Vanguard funds, so one warning: Vanguard Small-Cap Value (VBR) has a relatively weak tilt to small cap and value.  It holds 34% mid-cap stocks, for example, and only 11% are micro-caps.
https://www.morningstar.com/etfs/arcx/vbr/portfolio

Vanguard lets you buy stocks and non-Vanguard ETFs for $0/trade, so there's no fee to switch to outside ETFs.  I used to hold SPDR S&P 600 Small Cap Value ETF (SLYV), since it has only 1% mid-caps and 60% micro-cap stocks.
https://www.morningstar.com/etfs/arcx/slyv/portfolio

Do you rebalance between SCV and VGT?  They seem like opposites, and I wonder if that's good for rebalancing.

All are Vanguard funds for the most part, just finished consolidating accounts to vanguard. I use mostly their mutual funds, not ETFs, because I set up daily buys on auto purchases. Less logging in and buying makes it more mechanical and easier for me. The ETFs are a lot of hassle right now, so instead of daily purchases they only get bought 1-2 times a month. Switching to a non-vanguard fund would make it more manual for me which I do not like, but I appreciate the info on the Vanguard fund. I did notice that my portfolio has a mid-cap tilt rather than a small cap tilt. Perhaps something I will try to correct at some point. Maybe Vanguard will allow fractional shares and auto buying of ETFs some day.

Rebalancing is a 5%/25% rebalancing. I have a spreadsheet that flags the allocation if it is beyond the limit in either direction. I do not aim to balance between specific funds, but if something gets outside of the band then I will adjust it with the portion of the portfolio that is most out of balance in the other direction. Because contributions are still a large part of my portfolio (25% this year, 30% last year) I can mostly stay on top of the rebalancing through contributions. Right now my cash position is too high, but everything else is within the 5/25 bands. So instead of making an extra purchase right away I just stopped adding to my cash position until the portfolio catches up. If there is a big move I will buy/sell as needed, but I try not to trade between funds at this point, only buy. Once a year I get a big bonus at work which also helps get things back in line. Last year was the first time I actually had to rebalance, trading cash & bonds for TSM, EM, Ex US.

[NYC_Squirrel]

Mix of VIIIX/VEMPX at 70/30 to gain beta factor
VEMPX to gain additional exposure to small caps
VWNAX to gain value tilt

On morningstar's portfolio tab, you can switch the "Style" to market-weight, and view the percentages of micro/small/mid/large/giant cap companies.  I lump "giant" into large-cap, and micro-cap into small-cap:
VIIIX is 84% large cap / 16% mid-cap / 0% small cap
https://www.morningstar.com/funds/xnas/viiix/portfolio
VEMPX is 15% large (!) / 37% mid-cap / 48% small cap
https://www.morningstar.com/funds/xnas/vempx/portfolio

With a 70/30 blend, that gives:
64% large / 22% mid / 14% small

For comparison, the U.S. total stock market (VSMPX) holds:
VSMPX is 72% large cap / 20% mid cap / 9% small cap
https://www.morningstar.com/funds/xnas/vsmpx/portfolio

Current position is:

30% total us
10% SCV
10% (VGT, VHT, ARKK)
17.5% Dev. Ex-us
17.5% EM
5% REIT
5% total Bond
5% cash

You have a lot of Vanguard funds, so one warning: Vanguard Small-Cap Value (VBR) has a relatively weak tilt to small cap and value.  It holds 34% mid-cap stocks, for example, and only 11% are micro-caps.
https://www.morningstar.com/etfs/arcx/vbr/portfolio

Vanguard lets you buy stocks and non-Vanguard ETFs for $0/trade, so there's no fee to switch to outside ETFs.  I used to hold SPDR S&P 600 Small Cap Value ETF (SLYV), since it has only 1% mid-caps and 60% micro-cap stocks.
https://www.morningstar.com/etfs/arcx/slyv/portfolio

Do you rebalance between SCV and VGT?  They seem like opposites, and I wonder if that's good for rebalancing.

thanks, that's helpful. I'll have to readjust my VIIIX/VEMPX blend and maybe I'll trade in my VSIAX for SLYV in my IRA. How much % did you use to hold in your SLYV?(how tilted was your portfolio)??
 

[MustacheAndaHalf]

Mix of VIIIX/VEMPX at 70/30 to gain beta factor
VEMPX to gain additional exposure to small caps
VWNAX to gain value tilt

On morningstar's portfolio tab, you can switch the "Style" to market-weight, and view the percentages of micro/small/mid/large/giant cap companies.  I lump "giant" into large-cap, and micro-cap into small-cap:
VIIIX is 84% large cap / 16% mid-cap / 0% small cap
https://www.morningstar.com/funds/xnas/viiix/portfolio
VEMPX is 15% large (!) / 37% mid-cap / 48% small cap
https://www.morningstar.com/funds/xnas/vempx/portfolio

With a 70/30 blend, that gives:
64% large / 22% mid / 14% small

For comparison, the U.S. total stock market (VSMPX) holds:
VSMPX is 72% large cap / 20% mid cap / 9% small cap
https://www.morningstar.com/funds/xnas/vsmpx/portfolio

thanks, that's helpful. I'll have to readjust my VIIIX/VEMPX blend and maybe I'll trade in my VSIAX for SLYV in my IRA. How much % did you use to hold in your SLYV?(how tilted was your portfolio)??

Viewing my year end account statements, I can't find SLYV!  I bought it and sold it within 12 months, probably near the time I gave up on small cap value.  I held JKL (iShares Morningstar S&P 600 Small Value) for a few years, but it has a 0.30% expense ratio compared with 0.15% for SLYV.

Back then, my overall portfolio was half U.S. Total stock market, and half various tilts - including international as a tilt.  I also had tilts to value, not just small-cap value.  You can probably get a better idea of this thinking by reading "The Only Guide To A Winning Investment Strategy You'll Ever Need".  Larry Swedroe has a more recent book on factor investing that is probably even better.
https://www.amazon.com/Guide-Winning-Investment-Strategy-Youll/dp/0312339879
https://www.amazon.com/Your-Complete-Guide-Factor-Based-Investing-ebook/dp/B01N7FCW2D

Most of my portfolio is Covid investing right now, but let me focus on the indexing part.  My passive indexing portfolio is 1/3rd Total U.S. Stock, 1/3rd Total International.  I split the other 1/3rd between a momentum ETF and emerging markets ETF.  For the past 5 years, momentum beats the S&P 500 while small cap/value trails the S&P 500.  I think that matches the historical performance of the momentum factor.  I picked emerging markets because it has a lower correlation with U.S. and international stock markets overall.  But in theory, REIT might be a better pick, with even lower correlations.
https://www.portfoliovisualizer.com/asset-class-correlations

[Steeze]

Haven’t implemented this, but the idea seems to resurface;

Instead of holding a fund like VTI, why, aside from complexity, wouldn’t someone hold fixed percentages of (SCV, SCG, MCV, MCG, LCV, LCG) which would essentially be 100% correlated to VTI, but would have a rebalancing advantage. I would think something like this would outperform without a lot more effort and could remain mechanical.

Perhaps that is the idea behind an equal weighted fund rather than a cap weighted fund, though I am not sure equal weighting is necessary in the above example, I would still try to approximate the relative weights of S/M/L in VTI I think.

I struggle with the complexity aspect - there is something really elegant about the idea of owning a single fund like VT, Vanguard Wellington, or even a target date fund.

On the other hand I think that there is probably a real advantage to breaking up broad funds into components, holding fixed percentages, and rebalancing with a rule like 5/25.

[NYC_Squirrel]

Haven’t implemented this, but the idea seems to resurface;

Instead of holding a fund like VTI, why, aside from complexity, wouldn’t someone hold fixed percentages of (SCV, SCG, MCV, MCG, LCV, LCG) which would essentially be 100% correlated to VTI, but would have a rebalancing advantage. I would think something like this would outperform without a lot more effort and could remain mechanical.

Perhaps that is the idea behind an equal weighted fund rather than a cap weighted fund, though I am not sure equal weighting is necessary in the above example, I would still try to approximate the relative weights of S/M/L in VTI I think.

I struggle with the complexity aspect - there is something really elegant about the idea of owning a single fund like VT, Vanguard Wellington, or even a target date fund.

On the other hand I think that there is probably a real advantage to breaking up broad funds into components, holding fixed percentages, and rebalancing with a rule like 5/25.

yeah I've always wondered about holding fixed percentages that correlated to VTI and adjust as needed, it just seems more fun than holding a single fund like VT.

[NYC_Squirrel]

Mix of VIIIX/VEMPX at 70/30 to gain beta factor
VEMPX to gain additional exposure to small caps
VWNAX to gain value tilt

On morningstar's portfolio tab, you can switch the "Style" to market-weight, and view the percentages of micro/small/mid/large/giant cap companies.  I lump "giant" into large-cap, and micro-cap into small-cap:
VIIIX is 84% large cap / 16% mid-cap / 0% small cap
https://www.morningstar.com/funds/xnas/viiix/portfolio
VEMPX is 15% large (!) / 37% mid-cap / 48% small cap
https://www.morningstar.com/funds/xnas/vempx/portfolio

With a 70/30 blend, that gives:
64% large / 22% mid / 14% small

For comparison, the U.S. total stock market (VSMPX) holds:
VSMPX is 72% large cap / 20% mid cap / 9% small cap
https://www.morningstar.com/funds/xnas/vsmpx/portfolio

thanks, that's helpful. I'll have to readjust my VIIIX/VEMPX blend and maybe I'll trade in my VSIAX for SLYV in my IRA. How much % did you use to hold in your SLYV?(how tilted was your portfolio)??

Viewing my year end account statements, I can't find SLYV!  I bought it and sold it within 12 months, probably near the time I gave up on small cap value.  I held JKL (iShares Morningstar S&P 600 Small Value) for a few years, but it has a 0.30% expense ratio compared with 0.15% for SLYV.

Back then, my overall portfolio was half U.S. Total stock market, and half various tilts - including international as a tilt.  I also had tilts to value, not just small-cap value.  You can probably get a better idea of this thinking by reading "The Only Guide To A Winning Investment Strategy You'll Ever Need".  Larry Swedroe has a more recent book on factor investing that is probably even better.
https://www.amazon.com/Guide-Winning-Investment-Strategy-Youll/dp/0312339879
https://www.amazon.com/Your-Complete-Guide-Factor-Based-Investing-ebook/dp/B01N7FCW2D

Most of my portfolio is Covid investing right now, but let me focus on the indexing part.  My passive indexing portfolio is 1/3rd Total U.S. Stock, 1/3rd Total International.  I split the other 1/3rd between a momentum ETF and emerging markets ETF.  For the past 5 years, momentum beats the S&P 500 while small cap/value trails the S&P 500.  I think that matches the historical performance of the momentum factor.  I picked emerging markets because it has a lower correlation with U.S. and international stock markets overall.  But in theory, REIT might be a better pick, with even lower correlations.
https://www.portfoliovisualizer.com/asset-class-correlations

I just finished reading 'Your-Complete-Guide-Factor-Based-Investing', which got me all into factoring investing. If you have 1/3 in international and 1/6 in emerging markets, that's a lof of broad international exposure, do you also split them into small/value international tilt? or just a overall VTIAX/VEMAX enough?

I've also consider alternatives suggested from Larry Swedroe's 'Black Swans', maybe into P2P or Reinsurance funds, but that's probably 2 steps ahead of me right now

[MustacheAndaHalf]

One bad habit, I call my passive index funds my "core", but at this point they have become 1/4th of my portfolio.  I wouldn't recommend others follow my 50/50 split, since the goal is to avoid losing money.  There should be a diversification benefit, but it can take 10-20 years to play out.  Some decades the U.S. beats international, other decades international beats U.S. stock performance.  A Vanguard white paper I read suggested 20% international has the most certain diversification benefit, so I usually recommend that to others.  But here's what I hold:
1/6 MTUM (I like it better than Vanguard's U.S. Momentum ETF, VFMO)
1/3 ITOT (VTI is the same)
1/3 IXUS (equal to VXUS)
1/6 IEMG (same as VWO)

Vanguard doesn't disclose how they calculate momentum, so VFMO is opaque.  There's no index, just Vanguard saying how it works.  I prefer an external index, like Vanguard uses for it's passive index funds.  So MTUM tracks an MSCI momentum index, and the methods are well designed enough that I was impressed... the 0.15% expense ratio probably sealed the deal. (VFMO charges 0.13%, and holds smaller companies)

Note if you make a 9-box portfolio (small/mid/large) x (value/blend/growth), you create fixed percentages at one point in time.  The total stock market may drift, shifting more weight into large cap / growth.  The stocks with the heaviest weight in the U.S. stock market are Apple, Microsoft, Amazon, Facebook, Google.  All tech stocks, all in the "large/growth" category.  In 2020 I think they collectively gained +50%, significantly pushing up the performance of the entire stock market.  These are huge stocks, and if you rebalance by selling large/growth to buy large/value, it's a form of underweighting them.  So that's the risk of picking a 9-box approach, as I understand it.

[ardrum]

I'm 70/30 small cap value / long term treasury funds (eventually aiming to settle at 60/40 once at >21x living expenses invested).