Equity

SA #11: QMOM – Second-Best In The Momentum Crash of January 2023

QMOM: Second-Best In The Momentum Crash Of January 2023
February 06, 2023

Summary

  • January 2023 was brutal for momentum because many of last year’s losers suddenly outperformed – a momentum crash par excellence.
  • The Dow Jones US Market Neutral Momentum Index, a simple and transparent implementation of the long-short momentum factor, lost 19% YTD (as of February 3, 2023).
  • Most of the losses came from the short-side. The Dow Jones US Low Momentum Index, the portfolio of past losers, returned 25.68% YTD.
  • The Alpha Architect U.S. Quantitative Momentum ETF returned -0.83% YTD and underperformed the US market by >10% points. Although painful, this is still second-best in a peer-group of other momentum ETFs.
  • This speaks for the differentiated momentum process of Alpha Architect. Nobody likes bad months, but momentum crashes are actually a plausible reason why momentum worked historically and probably continues to do so in the future.


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SA #10: ACWI Vs. VT – Vanguard Wins Again

ACWI Vs. VT: Vanguard Wins Again
January 30, 2023

Summary

  • In this article, I focus on the iShares MSCI ACWI ETF (ACWI) and how it compares to the Vanguard Total World Stock ETF (VT).
  • For the longest common period since June 2008, ACWI currently lags VT by about 14%-points or 41 basis points per year.
  • The performance gap mostly comes from different underlying indices. VT tracks an index with >9,400 stocks whereas ACWI ignores small caps and “only” holds about 2,800 positions.
  • ACWI is thus farther away from the academic idea of truly passive investing (holding a market-cap weighted portfolio of all investable stocks).
  • ACWI also comes with higher fees (0.32% TER vs. 0.07% for VT). For investors who seek passive exposure to global stock markets, VT therefore seems the better choice.


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SA #9: VT – As Passive As Practically Possible

VT: As Passive As Practically Possible
January 29, 2023

Summary

  • The Vanguard Total World Stock ETF is one of the leading ETFs to invest truly passively in global stock markets.
  • Passive investing means holding the market portfolio. Applied to equities, this is the market-cap weighted portfolio of all available stocks in the world. By definition, this goes beyond the US.
  • Since 2008, the US market has a tracking error of 6.6% compared to VT. The active share currently stands at 41% which makes a pure-US portfolio a quite active strategy.
  • Historically, active bets on the US were well rewarded. But it’s unclear if this pattern continues. The case for passive investing and global diversification is therefore as strong as ever.
  • VT tracks the FTSE Global All Cap Index and holds 9,473 stocks from 49 countries. With just 0.07% TER, it is thus a very efficient instrument for global passive investors.


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SA #8: SPMO – Large Cap Momentum At Its Best

SPMO: Large Cap Momentum At Its Best
January 19, 2023

Summary

  • Momentum is the simple idea that stocks which performed relatively strong over the recent past (winners) tend to outperform those that performed poorly (losers).
  • The Invesco S&P 500 Momentum ETF invests in the 100 stocks with the highest “momentum score” (12-month return) from the S&P 500 Index.
  • Since inception in 2015, SPMO delivered momentum exposure with respect to the academic benchmark of Kenneth French. Since 2017, it also outperformed most momentum-peers.
  • SPMO especially outperformed MTUM, a similar large cap momentum ETF. However, most of this outperformance is unlikely systematic and probably comes from different rebalancing dates in 2022.
  • For investors who actively want large-cap momentum exposure, SPMO is a reasonable and cheap instrument. For those who want general momentum exposure, a fund with a larger universe is probably the better choice.


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SA #7: ITOT Vs. VTI – Since 2015 Very Similar, But VTI Still Ahead

ITOT Vs. VTI: Since 2015 Very Similar, But VTI Still Ahead
January 13, 2023

Summary

  • The iShares Core S&P Total U.S. Stock Market ETF (ITOT) and Vanguard Total Stock Market ETF (VTI) are among the largest ETFs to invest passively in the US equity market.
  • For the longest common period since 2004, ITOT underperformed VTI by about 20%-points or slightly more than 20 basis points per year.
  • However, just looking at this long-term performance chart is somewhat misleading here. Because of several changes, the two funds tracked 5 different indices over the last 15 years.
  • Starting in December 2015, ITOT switched from the S&P 1500 to the S&P Total Market Index which made the two ETFs mostly comparable. The performance gap to VTI also narrowed.
  • The analysis shows that even passive investors should not only compare ETFs by their historical performance but also pay close attention to the underlying indices, and even more important, index/benchmark changes.


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SA #6: VTI – Truly Passive Investing In The U.S. Market

VTI: Truly Passive Investing In The U.S. Market
January 6, 2023

Summary

  • In this article, I examine how investors can get truly passive exposure to the US equity market.
  • Passive investing emerged from academia and offers benefits through diversification, low fees, and historically better performance than the average active manager.
  • To passively invest in US equities, we need a market cap-weighted portfolio of all investable US stocks.
  • One proxy for that is the CRSP U.S. Total Market Index which currently consists of slightly more than 4,000 stocks – 8 times more than the S&P 500.
  • Historically, VTI followed this index with almost no tracking error and is thus among the best instruments to invest truly passively in US equities.


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SA #5: VOO – One Of The Best S&P 500 ETFs, But Far From Truly Passive

VOO: One Of The Best S&P 500 ETFs, But Far From Truly Passive
January 4, 2023

Summary

  • The S&P 500 Index is probably the most important equity index in the world.
  • For many investors, an ETF that tracks the S&P 500 became synonymous with passive investing.
  • In this article, I will compare the three largest ETFs on the index (SPY, IVV, and VOO) and challenge the passiveness of the S&P 500.
  • Based on historical performance, current expense ratios, scale, and the underlying manager profile, I would personally use the Vanguard S&P 500 ETF to track the index.
  • Within the US, the S&P 500 is a reasonable passive benchmark. From a global perspective, however, it is an active bet on US large caps.


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AgPa #35: Rethinking Active Management

Measuring skill in the mutual fund industry (2015)
Jonathan B. Berk, Jules H. van Binsbergen
Journal of Financial Economics 118(1), 1-20, URL/SSRN

From several of my earlier articles you may (correctly!) gained the impression that I am somewhat skeptical about the value-add of most (not all!) active fund managers. However, an excellent episode of the Rational Reminder Podcast featuring Jonathan Berk and Jules van Binsbergen convinced me of another perspective. This week’s AGNOSTIC Paper summarizes their work…

  • Alpha and outperformance alone do not measure skill
  • The average active manager added value – $3.2M per year
  • Investors identify and reward value-adding active managers
  • Active managers still overcharge – net alphas are negative

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SA #4: QMOM – Best-In-Class Momentum, Now 20% Cheaper

QMOM: Best-In-Class Momentum, Now 20% Cheaper
December 30, 2022

Summary

  • Momentum is one of the best-researched systematic investing strategies and has produced significant outperformance in the past.
  • The Alpha Architect U.S. Quantitative Momentum ETF follows a differentiated investment process that delivered strong momentum exposure in the past.
  • Over the last 5 years, QMOM outperformed several other momentum exchange-traded funds and an academic benchmark from Kenneth French.
  • On December 1, 2022, Alpha Architect (the manager of QMOM) announced that they will lower the management fee from 0.49% to 0.39% per 01/31/2023.
  • This is a reduction of about 20% and makes the QMOM ETF even more attractive for investors who seek active momentum exposure.


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SA #3: MTUM – Momentum, But Somewhat Slow

MTUM: Momentum, But Somewhat Slow
December 28, 2022

Summary

  • Momentum is one of the best-researched systematic investing strategies, and has provided significant outperformance in the past.
  • The MTUM ETF tracks the MSCI USA Momentum SR Variant Index and is an easy way to add momentum to a portfolio.
  • The ETF follows a transparent methodology and has performed mostly in line with the academic momentum benchmark from Kenneth French since 2013.
  • The key problem of the methodology, however, is the slow, six-month rebalancing – also the reason why MTUM suffered in 2022.
  • For investors who don’t want to take too much active risk and/or monitor active managers, the MTUM ETF is still a reasonable momentum implementation.


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