Low Volatility - Low Beta ETFs
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- Опубликовано: 7 июн 2019
- You may remember that market beta is a measure of the sensitivity between an asset or portfolio and the risk of the overall market. A portfolio with a beta of 1 moves with the market, so if the market drops 10%, we would expect the portfolio to do the same. A portfolio or asset with a lower beta would be less volatile than the market.
In an efficient financial market, risk and expected return should be related. Based on this relationship we would expect higher beta stocks, stocks with more risk relative to the market, to have higher returns.
Referenced in this video:
A Five-Factor Asset Pricing Model - papers.ssrn.com/sol3/papers.c...
Dissecting Anomalies with a Five-Factor Model - papers.ssrn.com/sol3/papers.c...
Understanding Defensive Equity - www.semanticscholar.org/paper...
Enhancing a low-volatility strategy is particularly helpful when generic low volatility is expensive - www.robeco.com/en/insights/20...
Catch up on the latest investing advice, insights and white papers here.
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Yet again you’ve helped us cut through the noise of so many confusing choices. I feel like I’m getting a PhD watching your vids
Thanks J strap!
Probably the first investment RUclipsr that backs statements with research articles.
Incredibly helpful.
When I've done five-factor regression analysis on the MSCI World Min-Volatility index, it has strong exposure to the profitability and investment factors as the Fama-French paper suggests but there is no value exposure. The index may act as a good proxy for those factors given no alternative.
Low-volatility and minimum variance strategies have provided higher Sharpe ratios and reduced drawdowns compared the broader markets. There is long-term evidence in multiple markets demonstrating the low-volatility anomaly. Even if the returns can be largely explained by a five-factor model, low-volatility does consistently provide higher returns at lower risk. I don't think it should be thrown aside.
This is EXACTLY the discussion of beta and its role in the CAPM, Three Factor, and Five Factor models that I was looking for. The podcast contains a huge wealth of knowledge, but spread over many hours of content. Sometimes a concise youtube video is perfect. Thank you Ben!
I really like how accurate yet easy to follow your advice is Ben! You’ve got a subscriber.
Thanks, Emil!
Hi Ben! First of all, thank you very much for the incredible videos. This is exactly what the DIY investment community (or the professional community for that matter) needs. Keep them coming.
I don't think I fully agree on this one. There is a lot of uncertainty surrounding the factor structure of returns in any given setting. As you mention, in some studies, the BAB anomaly can disappear by introducing other factors. This happens in not just the Five-Factor model paper that was published in 2014, look at Buchner & Wagner (2015)(1), for example. I'm not fully persuaded by the criticisms, because the BAB anomaly has been documented across many geographies and asset classes. It seems to transcend equities, or a particular market, and none of the papers you provided can offer an alternative explanation that applies in all of these contexts. Occam's Razor (Law of Parsimony) suggests that explanations that apply across asset classes would be preferable to others that don't. It is unsurprising that Fama and French prefer equilibrium explanations to institutional ones (like the presence of constraints), as they have shown this type of inclination in other contexts, as in their initial reluctance to consider momentum a factor. However, in this particular case, what they (and others) have offered isn't quite as convincing as the arguments advanced in the original paper, in my view. To me, it seems an open question. Hence, still an anomaly.
AQR actually published an interesting paper (2) on BAB very recently. They show robustness of the phenomenon to the investment and profitability factors if I'm not mistaking. A good read!
Let me know what you think.
Sources:
(1) Buchner & Wagner, "The Betting Against Beta Anomaly: Fact or Fiction?", Finance & Research Letters (2016)
(2) Alquist, Frazzini, Ilmanen & Pedersen, "Fact & Fiction about Low-Risk Investing", Journal of Portfolio Management (2020)
The decile (or quintile, doesn't matter) of stocks with a Beta closest to 1.0, outperform the market by over 2% a year. This shouldn't be possible if CAPM is sound.
Very informational video that is easy to understand with the animations. Keep up the good work!
Casgains Academy - Stock Market Investing good videos casgains
Thank you!
Great info and free for all to watch. Thank you for providing such a valuable service to all of us.
Thank you for watching!
I'm learning a heck of a lot from your videos, please keep making more! I'm still overweight in individual stocks (Canadian banks mostly) and I need to boost my holding in index fund.
Thanks Rick!
Nice work Ben, I'm from Brazil and I really enjoy watching your videos, keep doing this!
Thank you!
I love coming back to videos, thanks.
Man so much information, my mind keeps wandering, my heart pounds, I didn't understand a single thing.
I'm gonna have to rewatch this multiple times.
Thank you for this incredible video have a blessed day 🙌 😇 🙏
Thanks for a very clear explanation. I’ve never invested in low vol ETFs, but had never understood the subject, and now I finally do, so thanks! So I guess that the fact that the value premium has been positive in the Canadian market in recent years explains the recent great performance of Canadian low vol ETFs and their current popularity seeing many investors pay so much attention to past performance. It’s a little bit analogous to the naive exposure to the value premium that dividend growth investors get by focusing on dividends when the value premium is positive.
I agree with an earlier comment that a video on gold and it’s place (or not) in an evidence based portfolio, especially as gold is now attracting more attention as it’s going up.
Grant Maxted low vol has a weak relationship with value. Low vol stocks have been "expensive" in the 2010s and still beaten market cap on a risk-adjusted basis.
One of the best channel is youtube, thanks ben
Thanks!
You are amazing Ben!!!
Sound advice, loud and clear.
Ben, thanks for the excellent video. Keep up the good work. Cheers from Brazil. PS: Could you compare quality focus ETFs in some video in the future? Such as QUAL or IQLT
Got it, going all in small caps. Let´s gooooo.
Would be nice to hear your view on other popular factor choices, such as quality, momentum, liquidity, etc. Also what about using short positions to manage factor exposures, specifically with the etf such as BTAL.
Coming back to this two years later for a refresher haha
Best channel I've seen on investing. Keep up the good work. Interesting video. Why are always Black Rock products in your vids instead of Vanguard? Are they often better?
There is no real reason. Maybe they come up first in a Google search.
I prefer BlackRock over Vanguard personally because they are transparent in disclosing their audited financial statements every year. I want to like Vanguard, owing to the fact that they're somewhat like a mutual company or a credit union in that their US-listed funds own them, but they've taken advantage of loopholes in U.S. financial disclosure laws and opted not to disclose their financials. As indirect owners, we should be able to see the growth rate of their executive compensation.
Product wise, they're all virtually indistinguishable. The only thing to watch out for is whether they're (a) all cap or not and (b) for your ex. Canada ETFs, if they track different indices, there can be differences in terms of how certain countries are classified so mixing ETF issuers that track different indices, you might end up over- or under-exposed.
According to Portfolio Analyser, since Nov 2011, USMV and ITOT have the same CAGR (14.07) but the Sortino Ratio is 2.84 and 1.91, respectively. USMV appears to be the better investment to me.
Hi Ben, I have a question. You keep saying small or value stocks have better expected return because they carry additional risk. Can you talk about how are risks defined or measured, by the volatility of price? If so then low volatility stock should have lower risk, right? Can you elaborate what kind of risks does low volatility stock carry?
It depends on which model you use to look at Low volatility ETFs. The capital market model sure seems to show good returns with low volatility (and low risk) but really, they are just lumping 60% of the explanation to an unexplained "alpha" factor. Exposure to this alpha factor explains the higher unusual growth because.... it's correlated to higher risk exposure to small cap value stocks.
So no, low volatility ETF aren't less risky.
Great videos. Maybe you could do a video on the subject of counterparty risk regarding ETFs- such as VGRO and the like....Is this an additional risk on top of market risk and how do we quantify that. I mean no one though Bear Stearns was solid.....right? Look forward to hearing from you on this!
Rencent studies have shown that the low volatility premia is not explained by the profitability & investment factors. Especially when taking the long-only portfolio when calculating the factor premia. This suggest that low volatility is an other factor- distinct from the FF5 model. Also if one wants to calculate the true risk premiums over time (without market shift ie: low volatility being correlated to different factors in time), pure factors should be used instead of primary factors. But due to the complexity ,primary factors are often used.
Ben,
Wondering if you can help me out, a little bit ago I heard a rational reminder episode in which you had someone from vanguard on describing how and when they rebalance their asset allocation etfs ie VEQT. For the life of me I can't find which episode it was? Anyway if you get this thank you for the entertaining videos and podcasts.
While I'm feeling overwhelmed by the shear amount of information in your videos, it's all starting to come together for me. Finding a fund that is geared towards small cap value seems to be a challenge. What's your take on ASVDX? Does the higher expense ratio negate it potential? Cheers.
Hi Ben, is there a good multifactor ETF available for the DIY investor that beats a low vola ETF on a risk-adjusted basis? If so, I'm intested to hear about it! If not, while not being perfect (having some large low-profitable growth stocks in it), it might still be worth considering as an investment today, is it not? I'd love to hear your thoughts on this! Best, Daniel
What I like about buying certain factor ETFs is not having stupid Tesla in my portfolio while it's still overpriced and barely profitable.
Informative!
If a bunch of stocks have low volatility, would they not be less exposed to market beta risk (since as the market moves up or down, they move in a smaller magnitude)? So how can low vol be something outside of the CAPM and three-factor model?
Absolutely incredible and informative video, well-researched and presented from start to finish. But could anybody give me an explanation on growth exposure and value exposure? I couldn’t really get behind the meaning of these two terms... Would be glad to receive an answer, even if it is just a link to a good explanation video :)
Thanks Ben for the great video. I'm wondering when the low volatility tend to move to value regime and when to follow growth regime? Is there any clue or correlation with other market signals?
I do not believe so. This is one of the challenges with the strategy.
I've thought about them, but a few things make me pause somewhat... Namely the question of whether or not they're actively managed, but the biggest probably is whether or not they'd increase diversification of my investments without overcomplicating things - and if such would bring a meaningful benefit with it, as it would become the higher MER fund in my workplace account (TDAM Low Volatility Global Equity 0.73%, BLK EAFE 0.66%, and the other three (BLK S&P/TSX, BLK S&P 500, BLK Bond Index) at 0.54%). I suppose if I were to look at the diversification argument, I'd also have to factor in that my personal (aka non-workplace fund) accounts that such would probably be taken care of by either my Tangerine Balanced Growth or WealthSimple Growth accounts.
There's also the complication of where to add them into my planning, since the one my workplace plan has access to is close enough to 50% US Equity 50% International Equity for it's distribution.
Would I add them in if I was doing mainly DIY? ...At this time, the answer would probably be a definite no, doubly so given my current preference for going with small contributions every cheque (it's what the budget will allow at this time), where roboadvisors and Tangerine are helpful to go with as they'll invest almost all of the funds, instead of having cash lying around waiting for me to either log in, or have enough money to purchase a whole ETF unit.
What about momentum and other factors?
A brilliant video as always, but the four factor model and Momentum’s outperformance is excluded, presumably because the efficient market hypothesis can’t explain long only Momentum, the model is flawed here.
The general lazy arguments that it goes away after trading costs (it doesn’t, look at MTUM or IWFM’s OCF’s and then the performance of the underlying indices), or entails additional risk like Momentum crashes (it doesn’t, this is long/short Momentum, not long only, long only generates a majority of Momentum’s outperformance and isn’t subject to Momentum crashes, caused by the short side), hold no water.
That isn’t to say there isn’t a risk rather than behavioural explanation, there could theoretically be, but we certainly haven’t discovered it if there is yet.
I wish you jad visual aids. Like point PowerPoint summary or quick recap or simple curves
Great analysis and insights Ben. I notice from the theme of most of your other videos as well that you are a proponent of buying the market minus the bells and whistles. Over extended periods of time this strategy definitely works. My view is that if someone has a relatively short time horizon these low volatility ETFs have a role to play and the sacrifice in yield is a small price to pay. Your views? Especially for people in the decumulation phase? or is there a better strategy? The market in my Country has been going sideways/down for over 5 years now so a vanilla market ETF would have been very problematic more so for retirees. Thank you for engaging with your viewers in such a respectful manner. I am always amazed at the level of detail you enter into with such a vast audience and patience displayed.
Ben might have a better answer but conscious is that you cannot get market returns without market risk. If you have a short time horizon and want to invest your money with less risk you should weight more of your portfolio towards Bonds, GICs, and Cash (in a high interest savings account)
Hey Ben, another question for you. Whenever I hear of studies based on historic data that somehow explain the market I am immediately suspicious of data mining. Could you explain what makes studies like the three and five factor model different?
I realize I'm not the Ben in the video, but I have a general comment about the concerns of data mining and model validation from my own experiences in healthcare research. In theory a model should be initially generated on a robust dataset and then validated against a new dataset. Even more ideally the new dataset should be the result of a prospective study instead of retrospective ie. Monitor the next couple of years of data and see if the model still fits.
I would recommend doing a literature review for additional studies validating the model, or reading the landmark studies to see if they included validation within them. This is my approach when trying to separate coincidence due to data mining/p-hacking from meaningful models in my field.
A far less robust assessment is to review their methods for the following: how many factors did they consider, how tight was their threshold for significance, how large of a dataset did they use, and how accurately did the model match the data. Smaller numbers of tested factors a priori, tighter statistical thresholds, larger datasets, and more accurate results are all indicative of a valid model albeit a less robust evaluation than a separate validation study.
Hi Ben, how does it affect the portfolio put forward by your colleague on couch potato. Where the ETF suggested try to follow the indexes and thus the market. Wouldn't those be considered to have a beta value of 1 (theoretically?).
This does not affect a traditional market cap weighted portfolio. A total market index fund will have a beta of 1. This just means that you are not getting exposure to any other risk factors.
Can someone please just make a single 5 factor, internationally diversified etf that's available to the average retail investor. Thank you, I don't even care if it has a 1% annual fee.
Hey Ben. I'm almost through all your podcasts (I started them from the beginning a few weeks ago). I can't remember if it was there or one of your videos that you said odd sized lots increase costs. Could you go into more detail on that please?
Hi Dave, here is what I was talking about www.investopedia.com/terms/o/oddlot.asp
At Questrade for example this would show up as ECN fees.
USMV hasn't a small-cap portion whatsoever. On Morningstar it's stated that it's just giant, large and mid-cap. And its returns are outstanding.
Like usual, another great video. I wonder if I can request a video specific to compare Vanguard and Dimensional. As far as I know Dimensional has a better index selection by excluding unprofitable small growth but at expense ratio 0.50% and usually with higher turnover rate than Vanguard. It seems to me that while on paper Dimensional is superior but its higher expense ratio than Vanguard (usually in 0.10%) maybe its Achilles heel. I do hope Vanguard will trimmed unprofitable small growth from their index, but as for now I find their performance to be better than Dimensional when we are factoring taxes on turnover and higher expense ratio. Another video request if you won't mind, do you have a recommendation on cash equivalent investment other than bond? As recession in the US is expected in a few years, I am thinking of either increasing my bond portfolio (currently at BNDW) or buying low volatility index. Your thought on these are greatly appreciated.
That is a great idea. I have seen some terrible comparisons of Dimensional vs. Vanguard. I think this video could be worth doing.
I'm loving these videos on factors!
What are your views about the Momentum and Quality factors? Are they actual factors that explain the differences in returns between portfolios? If so, are there any ETFs you'd recommend for capturing these factors?
Quality is explained by size, value, and profitability. Controlling for those renders quality meaningless. Momentum is real, but it is a high turnover strategy which makes it harder to capture in practice.
@@BenFelixCSI Ok, but how can you capture profitability with an index fund? People who have no access to Dimensional or aren't active investors, need an ETF to capture value and profitability... so maybe Quality funds may be a good way to have both in a single fund.
You've mentioned the extra risk that small caps, value stocks and stocks with lower betas have, but I would still like to know what thoses risks are; how did they find out those types of assets had more risk?
You can download and read the paper yourself if you wish! I know I will!
Hi Ben, thanks for your videos they are all incredibly helpful. Would you say that it makes more sense to invest in factor ETF's such as Vanguards Global Value, Low Volatility, Momentum, Small Cap and Liquidity ETF's or to simply invest in the Global all shares index and rely on the weightings inherent in that?
I am 25 years old and want to make sure I am maximising my exposure to these risks in the best way possible over the long term.
Any thoughts are much appreciated.
Maybe a bit late, but my approach is just to invest in a globally diversified low cost index fund. My personal choice is MSCI ACWI. I try to keep it simple and just invest a fixed amount every month. I might be leaving a fraction of a percent in untapped potential on the table, but really I'd argue that the added effort and complexity probably aren't worth it. I have two kids and a full time job, and I really don't need another one as a fund manager.
Great video on a subject not that easy to explain. Great feat! So, it seems we cannot expect to beat the market efficiency. But what about on speed? Millions of dollars of technology investment is made to shave some nanoseconds of latency to allow for high frequency trading. Even Fama agrees that the market cannot be perfectly efficient, it likely takes a very small amount of time to catch up with information. Can HFT be a strategy allowing to catch signals in some market area before it balances out and make a profit? Could it be a good idea in developing markets which have low HFT competition? Or is investing in straight line optic fibers between Chicago and New York to gain few kilometers, and so a few picoseconds of latency a waste of money and brain power?
An HFT firm will use their superior speed jump in front of trades and take a small spread by providing liquidity. There is an opportunity to profit by being the fastest, but the competition in the HFT space has also increased. Reducing latency is where these firms compete, but their reward is not guaranteed as other firms attempt to do the same. For everyone else in the market, HFT actually tightens trading spreads. I wrote about this a while ago: www.pwlcapital.com/high-frequency-trading/
Great content as always. Personally I had ZLB.To (low vol canandian equity ETF) for 3 years or so. I chose it based on its past strong performance on annualized returns and good performance in 2015 when the Canadian market wasn't that great. Then as I get more educated in ETF and investment, I realized that past performance does not equate to future performance. Then I switched to ZCN.TO for my Canadian equity exposure because of about 8 times less cost. I would love to get factor exposures for my investment. But I am not that technically savvy yet. Do you have an easily understandable way to screen for ETF to find our their factor exposure, especially in Canadian exchange？
This was a little complicated. But I agree that low risk can still mean higher returns. Volatility can be good, just look at the nasdaq etf performance. In fact our youtube portfolio is based on stocks with wide moats and thus low risk but we expect there to be volatility.
I agree this one was a bit technical. But the people asked for it!
Hi Ben, I love your content but you got one essential thing wrong in this Video.
Most Low Volatility ETF track something like the MSCI Minimum Volatility Indexes.
The Methodology for these Indexes is NOT to build a portfolio of Low-Volatility Stocks, quite the opposite actually.
They are constructed using the Barra Optimizer building a portfolio with the lowest total portfolio Volatility, often by combining highly risky but negatively correlated stocks.
Thanks for another great video Ben. Hey what's the deal with these ETFs that list their MER as 0.00%? Also, how can the MER be 0.00% if the "Actual Management Fee" is listed as 0.65% or 0.19% like with DRFE or SFY? There are a few of those that appear to be a "free lunch" in terms of MER, namely: DRFE and DRFG on the CAD side and SFY, LSLT and SFYX on the USD side. Do you know what the hidden trick is with these ones?
I am not familiar with those ETFs, but the fund provider may rebate the management fee to get the expense ratio down to 0. Looking briefly at the Desjardins funds my hunch is that they do not yet have an established MER because they are so new. I am skeptical that the MER is 0%. If it is though, it is because they are rebating. For funds that truly have a 0% MER, they are just taking the securities lending revenue and calling it a day. A lot of super-cheap ETFs are already getting more of their revenue from sec lending.
Thanks Ben!
What about combining low beta with the value factor in order to exclude low beta stocks in a growth regime?
Aktien-Uwe Robeco do something like this
Thanks for the VDO Ben! Why not just looking and the sharp-ratio when selecting your stock? At the end this will give you relatively the best return with lowest risk (volatility), isn't it? Then with making use of the portfolio theory of Markowitz you can optimise your potfolio and potentially off set the total risk of your portfolio with keeping savings. Would appreciate your thoughts on this. Thanks!
The Sharpe ratio only looks at market beta. It does not capture the other known risk factors. That is why it is not very helpful.
Thanks Ben, really appreciate your feedback. Maybe I am thinking too simplistic, but assuming someone is not able to predict future revenue or risk (based on whatever info available, beside historic performance). Which I think is not such a strange assumption, while I believe it has been proven that fund-manager, on average, do not have a better performance then index-funds. So if this assumption is correct, would historic performance (returns relative to risk) of a stock not be the best predictor of its future performance, i.e. looking at historic returns and historic volatility? And if this the case, I would say the Sharp-ratio is the best predictor of its future performance, or do I make a mistake in my thinking? Thanks! (By the way, I believe you have never done a VDO on the Sharp-ratio, maybe an idea for a future VDO?)
@@erikjanse3994 my last reply did not make sense. Not sure where my brain was. Sharpe ratio and market beta are different things. I must have been thinking "The Sharpe ratio only looks at standard deviation. It does not capture the other known risk factors. That is why it is not very helpful."
Anyway, it is true that Sharpe ratio can help in finding good investment strategies. A lot of the research on factors (size, value etc.) will look at the Sharpe ratio of these strategies. Sharpe ratio allows us to see the historical return per unit of risk for a strategy, but it does not differentiate the types of risk involved. In building a portfolio we might want to target specific risks which work well together. Using the Sharpe ratio alone does not provide that insight.
This video is a perfect example. Low volatility stocks have an attractive Sharpe ratio relative to a market cap weighted index. Basing a decision only on that would lead us to believe that it is an optimal strategy. Looking deeper, we find that low volatility looks good because it combines the risk of value and profitable stocks together most of the time. If we want to build a portfolio based on these risk factors, we would target them directly as opposed to indirectly with low volatility as a proxy. Sharpe ratio alone would not offer that insight.
Does anyone have usmv and smmv?
One question I have bought into USMV and over the past 3 years I have out performed the S&P 500 Index fund? Why I should not be in this fund? It has out performed the ITOT 1 3 5 and 10 years.
Thomas Anthony Stick with SPLV/USMV versus VOO, ignore the Fama French / CAPM crowd. They curve fit their models and repackage everything as "risk".
@@bmwofboganville456
Can you expound on this? You are saying that the five factors dont accurately explain returns, and instead they are just picking 5 things that happen to be correlated in historical data but doesnt bear on future outcomes?
Which Dimensional fund ticker were you referencing when you said they took a total market approach and then excluded small cap, poor performing to achieve the same outcome as a low volatility ETF?
Dimensional has this exclusion in most of their funds. We more recently had their CIO on our podcast and he explained their thinking on low vol. ruclips.net/video/EJMDLS6xCz8/видео.html
Nice 👍
Is there some resource that explains the risks other than market risk? Pretty much all of the things I have seen about the multiple factor model just state that smaller value companies have bigger risks, but if they aren't visible on the market volatility, how do the risks affect the investors?
I did a paper on this earlier this year. Maybe it will be helpful. Larry Swedroe also has a comprehensive book.
3kcocv1r8qat44pla93eqfw7-wpengine.netdna-ssl.com/wp-content/uploads/2019/04/PWL-WP-Felix-Factor-Investing-with-ETFs_03-2019-Final.pdf
www.amazon.ca/Your-Complete-Guide-Factor-Based-Investing/dp/0692783652
@@BenFelixCSI Thanks, I read that paper (in your voice, only the little animations were missing :P) and it was quite interesting. The diagram on page 9 is especially sweet. I might check out that book, the penny didn't quite yet drop.
@@JMise I'm glad it was helpful! The book would probably clear things up further.
The best investing channel on RUclips. By far.
Question: you mentioned when low volatility stocks follow value regime(62% of the time), they have outperformed the market by 2%. However when they follow the growth regime(38% of the time), they have under-performed by 1.4%.
Then it is still on average +0.71% outperforming the market (+0.62*.02-0.38*.014=0.0071). Even though funds like USMV may have a bit higher expense ratio. In this case 0.15% vs 0.04% for IVV(S&P 500). It is net +0.6% towards low volatility index funds.
Does it makes scene to prefer USMV over S&P500 as core asset?
Assumption: I am in US and invest in US market.
I would not use either. I think ITOT would be the best core holding.
What would you do instead to invest in factors? If not the indexes from msci
I'm gonna have some serious hemorrhoids by the time I'm done this investing series!
How do you measure "investing conservatively?"
A conservative portfolio tends toward lower expected return, lower volatility assets (e.g. bonds) and an aggressive portfolio tends toward high expected return, high volatility assets (e.g. stocks).
Generally speaking, if you are young and want to save for retirement, it is better to go for high volatility assets, since you can ride out the ups and downs for decades. But if you are about to retire, then the higher average returns on stocks can't make up for the fact that the money you depend on could lose half its value next year if you hold an aggressive portfolio.
How can the following both be true:
#1 most of the benefits from low volatility come from excluding small cap growth stocks
#2 small cap growth stocks only form 2% of a total market index fund like ITOT
How could 2% of stocks explain the difference in returns between low-vol ETFs and ITOT?
That’s a great question. I’d have to go back to the Novy Marx paper but my guess is that he was not testing a total market portfolio, meaning that small growth would have played a larger role. This is why it is less of an issue in total market.
@@BenFelixCSI I had the same question after watching the video. Were you able to figure out what explained these seemingly contradictory statements?
Zeckul because the academics will do anything to shoehorn low vol into their models by suggesting it's a combination of other phenomena.
Are low vol stocks currently in a value or growth regime? How is this defined? How would one know this?
Use portfoliovisualizer.com to run a regression on a low vol product and then look at the rolling regressions chart to see what they are currently behaving like.
Can anyone tell me why profitability and conservative investing are considered "risk" factors? Risk is usually something you would NOT want. I can see why volatile small value stocks are risky, but why are profitable stocks risky? I DO want profitable stocks..
It's an old comment but maybe it's still useful for you or others that come around. It's not that those are risks but more that they influence risk-adjusted returns. Risk and return are mostly proportional those factors skew this e.g. quality reduces risk without reducing returns proportionally . Profitability and conservative investing skew risk-adjusted return by raising returns and minimizing risk. Things like low size increase returns by maximising returns so that they outweight the increase in risk.
How did the market know about the third factor before Fama and French discovered it in the data? To put it another way, this information had already been priced into the market for some time before it was identified in the literature, but this could not have happened if at least some of the market participants didn't know about it, right?
The theory is that stocks with certain characteristics carry additional risk, and in an efficient market investors are, on average, rewarded for taking on this risk with excess returns over the long term. The various characteristics that have been found to carry independent sources of risk have been labeled as 'factors'. Nobody needs to know about these factors for them to produce excess returns; to the contrary, some have suggested that they may no longer produce excess returns now people know about them (though this shouldn't be possible in an efficient market that prices in risk). At least that's my understanding - I'm not an expert in the field.
I am very sceptical of studies which try to shoehorn low vol in to these factor models. Also I don't get the argument that USMV is less diversified than SPY... once an ETF consists of dozens of holdings, and is not making sector bets, idiosyncratic risk vanishes.
How would I have done, had I invested 50 years ago into a portfolio of stocks that have high exposure to all 5 risk factors? Returns, volatility, draw down... Is there a paper on this or do you have a video on this? I couldnt find either, which is surprising.
Could Ben or someone else answer this?
The answer is that it depends on how much excess factor exposure you are targeting. For example, the Dimensional US Adjusted Market 1 Index is a US total market index that slightly increases the weight of securities with factor exposure relative to the market.
10/1/1969 - 9/30/2019 (50 years)
*Annualized Return*
CRSP 1-10 (Market): 10.36%
Dimensional US Adjusted Market 1 Index: 11.46%
*Standard Deviation*
CRSP 1-10 (Market): 15.50%
Dimensional US Adjusted Market 1 Index: 15.73%
*Lowest 1-Year Return*
CRSP 1-10 (Market): 42.48%
Dimensional US Adjusted Market 1 Index: 43.19%
Data source: Dimensional Returns Web
*Index description:*
_June 1927 - December 1974: Dimensional US Adjusted Market 1 Index Composition: Targets all the securities in the Eligible Market with an emphasis on companies with smaller capitalization and lower relative price. The Eligible Market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: Non-US companies, REITs, UITs, and Investment Companies Source: CRSP and Compustat_
_January 1975 - Present: Dimensional US Adjusted Market 1 Index Composition: Targets all the securities in the Eligible Market with an emphasis on companies with smaller capitalization, lower relative price, and higher profitability. Profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity. The Eligible Market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: Non-US companies, REITs, UITs, and Investment Companies Source: CRSP and Compustat_
@@BenFelixCSI Excellent answer. Very interesting. Thanks a lot.
It's really a bummer that even though the information you're offering is awesome there's essentially no way for average investors to actually gain exposure to these factors! Heck, it's not even
easy to gain international exposure even to the 3 factor model!
Another great video... thanks a lot :)
I‘ve heard about combining four ETFs on the MACI World:
low vola, quality, value and momentum in equal parts.
Does that really make any sense for a period of 20-25 years? Or would it be better to stick to the MSCI World (both sceanrios combined with 10-20% MSCI EM)?
I'm not crazy about the MSCI factor products. They generally have higher fees while having light exposure to the factors.
Ben Felix thanks a lot, Ben, for your reply. Great info, great advice and suggestion.
Hello Ben ! excellent video as usual , i just wanted your opinion on the performance of ZLB vs VCN the performance of ZLB outpaced VCN for many years now same goes to VUN vs ZLU.
Thanks Ben.
ZLB has had between 41 and 48 holdings since inception. It has also not been around for very long (October 2011). ZLU has had around 100 holdings and has been around a few months less than ZLB. I agree the performance has been impressive, but based on the concentration of the portfolios this could be a random outcome.
With on the research showing that low volatility returns are explained by known factors, we would need a lot more data to draw any new conclusions.
In reducing the volatility of your portfolio you may feel more comfortable with a greater weighting of equities. That may increase overall returns in the longer run?? Correct?
That is possible, but you are paying for it with less diversification and higher turnover.
Great video, I’m interested to hear your thoughts on Gold.
Gold in the long run is just inflation. Which is still great, mind you. Gerald Celente says: if you can't touch it, you don't own it. At least gold you can touch. Bank accounts and ETFs and funds are all nice and dandy, but if the government is ever in a crisis, like in Cyprus, they'll just take it from you. So if you want 2% or 3% per year over the long run, minus the fees for producing the coins or bars, go for it, at least you'll keep your savings and they won't inflate away. Mind you they can also take gold from you. In the U.S. in the 1930s they made it illegal to own gold, everybody had to hand in their gold to the government, and once they thought they had everybody's gold, then they repegged the price of gold to reset the USD against gold. So even owning gold is not a guarantee that the gov't won't take it from you. Nothing is a guarantee, and if there is anything that they cannot do, and when all else fails, they'll just take you to war.
I think this question would warrant a video. There is some good research on gold. Barwin mentioned some of it. It is a good inflation hedge in the very, very long run. Not so much in the short run.
I recommend examining the performance of the Russell 2000 pure growth stocks (I.e. R2K growth stock excluding ones that are also members of R2V) since the start of the growth rally beginning in 2017. They beat all factor portfolios mentioned here. Notice that small growth underperformance was supposed to be the source of low-vol outperformance.
These conclusions are not nearly as clear cut as this video makes them out to be.
I recommend using more than two years of data to draw any conclusions about the behavior of stocks.
@@BenFelixCSI Ok. Go to Kenneth French's website and look at how many months HML has been in drawdown (it is 150 months as of 5/2019). Long enough?
Try looking at the full data set. The majority of months have been positive. HML has been positive more often than the market risk premium. You can’t take the most recent data and ignore the rest of history. That’s the definition of recency bias. Try some Bayesian updating in your thinking. The recent poor performance of value is not meaningful when it is weighed against the past. There have been 10-year periods where the equity premium was negative. Is that a reason to stop investing in stocks? Nope.
Felix, you are a true believer in Fama French. They now have a 6th factor for Volatility. These factors are fitting a curve but how do they translate to a true risk to the investor?? It is so common to measure risk by volatility. Risk also needs to have some option, Catastrophe and fat tails components.
See this week’s video. Coming Saturday. My name is Ben.
Ben, on Saturday comment on How Mid Cap increases investor's risk, I understand how Micro cap does. Also comment on how Value, good cash flow, and quality increases investor risk. Seems to me these are good factors not risk factors.
Why don’t high beta stocks outperform the market, if they have higher risk?
There are more risks than market. They are high on market risk and low on the other risks that drive stock returns. The combo leads to a bad outcome.
TheAndrew0085 taking more risk is rewarded up to a point then it fails with very volatile assets. There may not be a risk premium at all.
You mention that LV ETF’S have larger turnover with increased fees. I have no increased churn fees in my portfolio. Think you need to explain.
If you look at the annual report for USMV you will see that it generally turns over more than 20% of its holdings each year. It has an expense ratio of 15 bps. ITOT (US total market) generally turns over well under 10% and has an expense ratio of 0.03%. Turnover comes with added transaction costs. You may not see these additional costs in your brokerage account, but they are happening inside of the ETF.
USMV:
www.ishares.com/us/library/stream-document?stream=reg&product=I-USMV&shareClass=NA&documentId=1253933%7E1253934%7E926269%7E1303549%7E1370868&UrlOverride=%2Fus%2Fliterature%2Fannual-report%2Far-ishares-edge-msci-minimum-volatility-etfs-07-31.pdf
ITOT:
www.ishares.com/us/library/stream-document?stream=reg&product=I-SP1500&shareClass=NA&documentId=925902%7E925940%7E926348%7E925661%7E925593&UrlOverride=%2Fus%2Fliterature%2Fannual-report%2Far-ishares-core-s-and-p-etfs-03-31.pdf
iShares large cap value ETF JKF has a 24% turnover. No one says don't invest in value due to turnover. USMV & SPLV are very large liquid blue chips.
I've read just about everything I could find on low vol, and it seems like the experts are really still making educated guesses as to why it works, and nothing in the factor world seems to fully explain it all of the time. I am starting to suspect that the real reason it outperforms doesn't have as much to do with factors as it does with the inefficiency caused by individuals and advisers trying to beat the market. That might also explain why it seems to be dynamic, sometimes following Value and sometimes following Growth, depending on the market phase. Comments?
The behavioural argument is certainly plausible. That begs the question of how long it will persist. Are limits to arbitrage safe bets?
@@BenFelixCSI I suspect that if everyone bought the total world stock market, then this "behavioral factor" would vanish, no?
Thanks for the great videos Ben! One very small correction, the 'van' in 'Pim van Vliet' (8:22) should be pronounced with an 'a' similar to the one in 'star', listen at translate.google.com/#view=home&op=translate&sl=nl&tl=nl&text=Pim%20van%20Vliet.
Thanks Bart!
There is no risk premium for riskier investments, CAPM doesn't work.
@john doe The most volatile stocks underperform. The market is not efficient, perhaps it's fairly or mostly efficient. All economic models like CAPM are piggybacked on top of the mass of human behaviours.
Pros and cons of going 100% all world ETF?
Pros: capture the equity risk premium and receive a reliable long-term outcome. Cons: you might feel sad when your friend tells you they bought [insert unicorn stock] and made big gains.
@@BenFelixCSI lol, thanks, makes me feel better already. But what about along the lines of all world ETF vs making up your own portfolio with mixed ETFs like s&p, USA small cap, Europe, Japan, developing countries etc? Is there any point to laboring over such a portfolio when I can just buy 1 ETF to rule them all?
There are some cases where you can be a bit more tax efficient by splitting things up, but that will depend on your country. In Canada I could tell you what I mean, but if you're in a different country I wouldn't know the details there. You could also improve the portfolio a bit by adding additional small cap and value, but that becomes a choice about the tradeoff between optimization and complexity.
I have a video and a paper on small cap and value if you want more info:
ruclips.net/video/2MVSsVi1_e4/видео.html
www.pwlcapital.com/resources/factor-investing-with-etfs/
I watched this video in my car and a picture of Ben Folds came up on the console. Apparently you're famous 😂.
Hi Ben
Hey
I have to disagree with this video. Seems like economists just change their stories to fit the theories. Two years from now, we’ll have 8 factors. If Fama and those guys are some bright why aren’t they making billions in the market?
iali00 Momentum & low vol breaks their model
If these factors are largely behaviourial, they are the province of psychology not math regressions
Like he said, all models are flawed. It's an ongoing process of learning the markets nature.
Looking tanned buddy! For a white guy.
Must be the lighting.
I like your videos, but this one is just bad. Just say that the market is not perfektly efficent. Expensive active management still does not work in most cases. You can recommend factor ETFs.
The pricing models are just some made up shit so scientists do not have to admit that the market is not efficent. It is possible to beat the market. I have done it over the last few month with MasterCard, Visa and german real estate stocks + smart beta and IT ETFs.