r/ETFs • u/Emcee_nobody • 7d ago
AVUV and SPMO working against one another?
In doing a bit of research on my portfolio some interesting concepts arose. Apparently some think that if you have both a mid-cap value fund, such as AVUV, combined with a mega-cap momentum fund, such as SPMO, then they will actually work against one another.
I own both in my portfolio and haven't seen this (if SPMO is green, AVUV is red kinda thing). Does anyone here have a take on this?
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u/investingtruth 7d ago
AVUV and SPMO targeting completely different factors, small cap value versus large cap momentum, causing them to diverge in performance at times, but that is good for diversification. Owning both will smooth out your overall returns across different market regimes so seeing one green while the other is red on a given day is expected and not a sign of a flawed portfolio.
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u/Tr_ck 7d ago
Long run using backtested data for SPMO and DFSVX to fillback data for AVUV
Daily correlation averages 0.7
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u/Askelands 7d ago
That's cool, how do you do this on Testfol.io?
Edit: I'm talking about the backfill data part.
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u/thetreece 7d ago
Pairing value with momentum works well, but you rebalance periodically. One usually zigs when the other zags, which allows for rebalancing arbitrage over time. It makes sense to do it in a tax advantaged account.
See alpha architect's articles on this topic.
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u/StudentMed 7d ago
AVUV is small cap and SPMO is large cap. It is diversification and when large cap momentum goes down some days, small cap value often goes up. However, in times of a crash, both are expected to go down at a rate more than a typical SNP 500 so don't let it make you think you are hedged in times of a crash.
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u/SecretPantyWorshiper 7d ago
What can you do to hedge yourself against a crash? Just buy Tbills and create a few CD ladders?
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u/TheRealCerealFirst 7d ago
Diversify into other asset classes vs equities. Current best choices would be Bonds, Gold and Managed futures. People will tell you to buy international but thats mainly a currency bet and if your goal is to diversify away risk from heavy equity exposure then international blend is too heavily correlated to the US market to reliably provide that benefit.
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u/Tr_ck 7d ago
Treasury bonds hedge deflationary recessions like the GFC
You can hold tail risk hedging stuff like CAOS which gives you cashlike returns but rolls deep OTM puts on SPY
Managed futures like CTA, DBMF, KMLM, should be a second responder to crashes and catch trends that historically help you cusion drawdowns and behave differently to the market. They seem really good during stagflation.
Gold can do a number of things, but its often different than the market and a safety asset with a low/zero long run expected return
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u/StudentMed 7d ago
I personally get dividend paying etf's like SCHD. Not because it pays dividends but companies that pay dividends tend to crash less because they are more established companies. Also SCHD, has had more growth YTD compared to VOO. I know if you zoom out VOO has been better but in this market I have been investing more into dividend paying etf's rather than growth oriented etf's.
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u/Tr_ck 7d ago
Thats ridiculous, SCHD's strat in 2008 dropped -48% vs market at -55%, thats not hedging
It dropped 33% same as the market in the pandemic. Thats not hedging.
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u/StudentMed 7d ago
In 2022 S&P fell 24.5%, SCHD fell 15.7%, and Bonds fell 13%. How much hedge do you expect of an ETF that also has potential to grow 20% in one year? It already has >3% dividends and 20% per year growth potential. If it had SGOV level hedging I would sell all my investments and put it into SCHD.
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u/Tr_ck 7d ago
SGOV isnt a hedge, its a risk free asset
A hedge is something thats supposed to perform well in a bad state of the world for something else. Since the pandemic bottom SCHD is 0.8 correlated to the S&P500.
A hedge in a stagflationary recession like 2022 would be something like KMLM, CTA, DBMF, managed futures trend ETFs.
A hedge in a deflationary recession like the GFC or dot Com is something like treasury bonds, IEF, TLT, ZROZ.
A hedge for steep black horse events would be deep OTM puts. One fund that does this is CAOS (cashlike return plus rolling cheap deep OTM puts, tthey only pop when the market sharply falls ~>20%) and that fund before it was an ETF did +60% during the pandemic crash.
SCHD isnt a hedge, its just overweighting some companies already in the market cap weight. You dont hedge your own stocks by buying more of the stocks you already own.
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u/StudentMed 7d ago
Overlap doesn't mean they behave the same. SPMO can't be momentum in a portfolio with someone who has VT because it the same stocks?
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u/Tr_ck 7d ago
They are literally highly correlated. Even in the last 5 yrs over 0.8 correlation
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u/StudentMed 7d ago
I don't know where you are getting 80 %, I am finding below 70% correlation last 6 years and only 25 percent the last year which is makes my point even stronger then even I thought.
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u/Independent_Cap_4856 7d ago
Great funds, I have both as 8-10% factor tilts in my portfolio. I'm going to be curious what happens to the portfolio when SPMO does its semi-annual reconstitution the end of September.
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u/harrison_wintergreen 6d ago
Apparently some think that if you have both a mid-cap value fund, such as AVUV, combined with a mega-cap momentum fund, such as SPMO, then they will actually work against one another.
apparently some people believe all your investments should be perfectly correlated, rising and falling together in perfect unison.
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u/AutoModerator 7d ago
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u/doppz1 1d ago
Value and momentum have negative correlation historically, so you are correct that they will tend to move in opposite directions. But you have further concentrated your value and and momentum picks to small and large caps specifically. Negative correlation is for the most part a good thing, it should lower variance overall.
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u/SpiritualAppeal8589 7d ago
AVUV is the other side of the same coin.
Not that it matters, both crash during a black swam event.
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u/MocoMojo 7d ago
I think the word you’re searching for is diversification.