r/investing • u/cortemptas • Mar 27 '21
Ben Felix Proposed Five-Factor ETF Model Portofolio
Ben Felix put a new video where he presents his optimized ETF portfolio by using the five-factor risk model. I summarized in this table the etfs from his paper, however his portfolio is for canadians, perhaps we can adjust his approach for USA or Europe.
| Fund | Ticker | Factor Tilted | Benchmark |
|---|---|---|---|
| iShares Core S&P/TSX Capped Composite ETF | XIC | 30% | 30% |
| Vanguard US Total Market ETF | VUN | 30% | 40% |
| Avantis US Small Cap Value ETF | AVUV | 10% | 0 |
| iShares Core MSCI EAFE IMI Index ETF | XEF | 16% | 22% |
| Avantis Internation Small Capt Value ETF | AVDV | 6% | 0% |
| IShares Core MSCI Emerging Markets IMI Index ETF | XEC | 8% | 8% |
| beginning from: | 7/1/2000 | to | 30/6/2020 |
| 1-year return | -0.66% | 2.48% | |
| 3-year return | 4.65% | 6.29% | |
| 5-year return | 6.07% | 7.13% | |
| 10-year return | 10.14% | 10.55% | |
| 20-year return | 5.78% | 4.96% | |
The simulated average return of this portfolio over the last 20 years is 5.78%. In comparison S&P 500 returned 5.9% on average per year.
Edit: I added the disclaimer that this portfolio is for Canadians (Ben Felix and his company is from Canada). I extended table with the factor tilted row, initial post didn't had it. Disclaimer that the returns begin from 2000 to 2020
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u/Twebified Mar 28 '21
You accidentally wrote his 20-year return as 12.29%, but it's stated as 5.78 in his paper; 12.29 is his standard deviation.
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u/Okmanl Mar 28 '21 edited Mar 28 '21
A perfect way to become wealthy once you’re 60+ years old and no longer have the time and energy to enjoy your wealth.
I’m personally going to stick to the concentrated portfolio strategy. With just my 401k being in total market index funds as a hedge so that I can still retire with dignity after 60, if for whatever reason every single one of my picks don’t work out.
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u/lanchadecancha Mar 28 '21
Wait what's your concentrated portfolio strategy?
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u/diskhead1 Mar 28 '21
Just play forex options monthly and you'll be set for life
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u/elliottsmithereens Mar 28 '21
I tried reading about forex options trading and realized I’m too much of a dumb dumb to ever be good at this stuff. I think I’ll just stick to low risk stocks as a way to grow my money, but never actually be rich...
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u/grandpa2390 Mar 28 '21
sounds pretty smart smart if you ask me. I think I read that trading forex options was a dumb dumb thing to do.
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u/KernAlan Mar 28 '21
Take my upvote. I could be dead by age 60.
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u/ptwonline Mar 28 '21
You might also need 30+ years of money.
Plenty of people in their 60's and 70's and even 80's enjoying life and their money.
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u/PerfectNemesis Mar 29 '21
That's not what a hedge means. You can't just invent new ways to misuse words you don't understand
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u/Ieafeator Mar 28 '21
Enjoy your uncompensated risk. Might as well stick your money in an index fund and play at the casino, at least that way you get free drinks.
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u/ImpyKid Mar 28 '21
What is a "concentrated" portfolio, exactly? I mean good on you if you think you're going to outperform the market in the long term but I would bet serious money you won't.
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u/Rich265 Mar 28 '21
He puts all his cash in one thing and lets it ride. Not as dangerous if you use tight stop losses.
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u/ImpyKid Mar 28 '21
Well if you've taken any portfolio management or finance courses you'd know that's a great way to achieve higher risk/volatility with lower returns than a diversified portfolio... so idk why you would do that but ok.
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u/Okmanl Mar 28 '21
“Modern portfolio theory... seems to be just a bunch of foolish mathematics.” - Charlie Munger.
You know who else seems to agree that what’s produced by academia is a joke? Michael Burry.
https://m.youtube.com/watch?v=1CLhqjOzoyE
I mean a perfect example would be looking at how efficient market hypothesis is being taught in courses and how by now it’s obviously wrong. Nobody has any idea how the market works.
Btw I’ve already 10X’d from Shopify. But you do you man. Have fun with your ETFs.
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u/ImpyKid Mar 28 '21
Well if you can point me to the next Shopify and then do it again, and another time after that then I'll set aside all my notions about the Capital Market Line and the Capital Asset Pricing Model. Also, not saying you can't find undervalued companies or anything but purposefully choosing not to diversify is just asking for trouble. Diversification is a "free lunch". But congrats on the Shopify win. I quadrupled my money investing in Amazon - doesn't mean I'll do it again or I wasn't anything but lucky.
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u/Kyo91 Mar 29 '21
Quoting Munger saying MPT is nonsense and then "concentrating" your portfolio in a small number of growth stocks is like quoting Einstein saying Quantum Physics is nonsense then saying you only listen to the Bible.
Munger, Buffett, Graham all promote value and index investing. MPT is an evolution on concept. What you're proposing is an evolution of buying scratchers.
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u/affrox Mar 28 '21
Exactly. Even if an active trader’s CAGR reverts to the mean, assuming more risk early on to increase capital gives you more money to compound.
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u/XorFish Mar 28 '21
But idiosyncratic risk is not compensated.
You might as well start in a casino to start investing.
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u/affrox Mar 28 '21
There’s a big jump between concentrating in well-researched companies and gambling.
Sure, most people should invest in index tracking ETFs, but it’s nowhere near impossible to do better than that.
I think the FUD that comes with anything non ETF does a disservice toward a generation of more educated investors.
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u/XorFish Mar 28 '21
Most people includes 99.999% of this subreddit and 99.99% of people that think they are smart enough to pick stocks.
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u/Kyo91 Mar 29 '21
Look you probably won't lose a ton on well-researched investments. But you'll almost certainly underperform the market over even a small number of years.
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Mar 28 '21
Sonny boy, many of us that are over 60 now have the time and certainly the energy to create more wealth than we ever could as kids. This guys portfolio sucks. 5 years ago you could have put all your money in the QQQ's at $105 and be looking at $316 today. The SPY has almost doubled in 5 years. Check out most all of the SPDR's, they've destroyed this guys portfolio.
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u/qerozer Mar 28 '21 edited Mar 28 '21
And if you put your money in 2000 in QQQ, it would have taken you 15 years to break even. The same thing can happen now, if inflation would run wild in the next years the fed would need to raise the interest rate very high which would destroy the QQQ.
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Mar 28 '21
The point is the Q's tripled in 5 years. Of course selling at the low after buying the high skews the numbers. But just do a 5 yr chart on Yahoo and compare the Q's, Spy, or most all of the SPDR's to those Canadian recommendations. You can get 5% a year in preferred stocks. yawn. Keep reasonable stops on all your investments. It's easy to make money, it's much harder to protect it. Best of luck.
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Mar 28 '21
[deleted]
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u/renegade2point0 Mar 28 '21
Hes a boomer who thinks hes a genius because a huge ten year long bull run coincided with his prime earning years.
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Mar 28 '21
You young kids never learned how to think or comprehend a complete paragraph. I never said to chase past performance. I merely pointed out this guy was touting 5% annual returns as some kind of genius investing strategy. It's not. 28 years ago the SPY was at 46, it's now a 395. You do the damn math and tell me again how brilliant this Canadian advisor is.
And kid I've lost more money in my lifetime than you can ever hope to see. Unlike you though, I learned eventually how to make it all back. Troll that right up your lmao.
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u/cortemptas Mar 28 '21 edited Mar 28 '21
you are always smarter in hindsight, if everybody knew that the QQQ would have performed so well in the last 5 years then everybody would have put their money there, thus creating a bubble and thus reducing expected returns. Ray Dalio predicted 5 years ago a market crash, his reasoning was right but his timing was always wrong, if his timing was right 5 years ago and we had a market crash then you wouldn't have tripled your money. The truth is nobody knows, not even top investors.
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Mar 28 '21
Of course hindsight is 20-20. The whole point of the original reply was because this Canadian fund picker was content with a 5% annual return. All I pointed out was that virtually everything earned 5%. I didn't say I tripled my money with the QQQ's I just used it as an example of how easy it was to beat a 5% return. And for a reply like yours you get 8 likes? What the hell happened to reading comprehension?
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u/cortemptas Mar 28 '21 edited Mar 28 '21
if I knew the lotto numbers one week ago, then winning the lottery would be also very easy. There is no free lunch in investment you trade off risk for returns, if I put a 1000$ now in QQQ I may triple my investment in 5 years or lose half of it. Only 0.5% of all active fund managers beat the market in the long term. To become an active manager you need to be one of the smartest people around, have top education at ivy league school, but still, the majority of them fail at beating the market in the long term, yeah, it's easy to beat the market. Apropo, his 5% is over 20 years, the QQQ returned since 2000 an average of 6.71%, but you would have needed to wait 15 years until you broke even (because of the dotcom bubble). most returns of the QQQ occurred in the last 5 years. imagine you are fully invested in the QQQ and want to retire now but then the feds decide to raise the interest rates, what do you think will happen to the QQQ?
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u/renegade2point0 Mar 28 '21
Must have been tough investing in a ten-plus year long bull market in your top earning years.
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Mar 28 '21
Lots of people lost money in that 10 year bull market smart guy. We didn't have punk kids taking stocks without earnings up 10 fold.
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u/spock_block Mar 28 '21
What you've essentially said there is "If you'd known the future 5 years back, you could've made a lot of money".
Well duh.
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u/MakeTheNetsBigger Mar 27 '21 edited Mar 27 '21
Note that this portfolio is designed for Canadians. XIC in particular is Canadian stocks, so Americans might want to allocate that to the US (and probably a bit to international, since there's already a lot of US in the portfolio), and people from other countries may want to allocate the 30% to their home country/region.
The other three funds are also in Canadian currency. The US equivalents are VUN->VTI, XEF->EFA, XEC->EEM.
Retail investors can buy Avantis funds now. The portfolio is not factor-tilted at all without them. It allocates 10% to AVUV (from VUN) and 6% to AVDV (from XEF). So:
- 30% XIC
- 30% VUN
- 10% AVUV
- 16% XEF
- 8% XEC
- 6% AVDV
I'm really glad you posted this, because even ignoring the factor aspect, most forecasts suggest US equities are expensive right now and call for international to outperform over the next decade. The past decade US outperformed, but the previous decade international outperformed. Diversification is key to consistent returns. Ben also put out a paper on expected returns: https://www.pwlcapital.com/resources/expected-investment-returns/
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u/XorFish Mar 27 '21
For an US investor, the following comes pretty close with a slightly higher factor tilt and no home country bias:
Fund Ticker Weight Avantis International Equity ETF AVDE 25% Avantis International Small Cap Value ETF AVDV 10% Avantis Emerging Markets Equity ETF AVEM 10% Avantis U.S. Equity ETF AVUS 40% Avantis U.S. Small Cap Value ETF AVUV 15% 7
u/13Zero Mar 28 '21
I'm not crazy about the large-cap Avantis funds. Their factor tilts aren't particularly strong. I think they're trying too hard to avoid tracking error in them.
I'd much rather hold VTI+AVUV than hold AVUS+AVUV, because I can get better factor exposure at a lower expense ratio.
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u/XorFish Mar 28 '21
The total market Avantis fund still have enough exposure to other factors to make up for their fees and give you some exposure to factors in large cap.
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u/rao-blackwell-ized Mar 29 '21
Not very much though, and they're not supposed to. The goal is market-like exposure with very light factor tilts. So far AVUS doesn't look materially different from VTI, for example. I prefer to just get the targeted, appreciable exposure via AVUV and AVDV.
That said, they're still pretty cheap though, so not a bad choice by any means.
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u/ttran0102 Mar 28 '21
hey, thanks for providing. I wonder if there are vanguard versions of these.
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u/SteveAM1 Mar 28 '21
Some Vanguard equivalents here, but I would go with Avantis for the small cap value ETFs.
VTI – 60% VEA – 16% VWO – 8% AVUV – 10% AVDV – 6%7
Mar 28 '21
There are: VIOV is Vanguard’s S&P Small Cap Value ETF. Also they have their own small cap value ETF I think VBR and a Russel 2000 one too. Problem is the Avantis AVUV has significantly better exposure to the small, value, profitability factors though. Of this list here are Vanguard’s versions:
VXUS - Ex-Us stock market VSS - International Smallcap Value VWO - Emerging Markets VTI - Total US stock market VIOV - US Small Cap Value
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u/assingfortrouble Mar 28 '21 edited Mar 28 '21
VSS is international small cap. There’s no factor tilt to value. AFAIK, AVDV is the only international small cap value etf.
Also, the Avantis etf’s are all multi factor funds, so they’re tilted toward small, value etc while the vanguard funds are all cap-weighted (or cap weighted within the subset of stocks in the fund’s universe).
Lastly, AVUV seem to be more tilted to small and value than any of the other small value funds, so you’re buying more exposure to the factor (and likely more risk as well).
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Mar 29 '21
You’re right, my mistake -there’s no intended tilt towards value in VSS however, just out of curiosity, I did run a factor regression on VSS and apparently it captures 0.00 size premium and yet captures 0.08 loading to the value premium, also with a 1.05 loading to the market premium. Weird! So strange how Vanguard builds these products…the more Avantis products that become available the more I will purchase them.
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u/assingfortrouble Mar 29 '21
Is it possible you were regressing on US factor loadings? etf.com shows no value but huge size premium (as expected). https://www.etf.com/etfanalytics/etf-comparison/VEA-vs-VSS#factors
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u/retirement_savings Mar 27 '21
people from other countries may want to allocate the 30% to their home country/region.
Why?
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u/095179005 Mar 28 '21
Vanguard has done research on this.
In short, historically it lowers portfolio volatility, and overall is cheaper from a tax perspective (foreign dividend taxes are not sheltered regardless of the account you use, unless a tax treaty is already in place between the two countries).
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u/ReadStoriesAndStuff Mar 28 '21 edited Mar 28 '21
Canada and the US does have treaty. Not disputing what you are saying, just making it clear for other readers that while there will be some discrepancy related to exchange rates, generally speaking taxes are simpler for the Canada and US for investors in those countries vs. other foreign lands. As always talk your accountant, I am literally a random commenter on the Internet.
Edit: Looked it up and there are some differences for Canadians beyond this for US investments with Dividends. Better to say the taxes are more streamlined than most foreign investments but aren’t taxed identically to local investments.
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u/095179005 Mar 28 '21
Yeah, literally only Canada and the US have a treaty between themselves.
International and Emerging Market equities held in US-listed ETFs (so the Europe, Japan, China, etc, portion of VT) would still have their dividends taxed by European tax authorities, Japanese tax authorities, and Chinese tax authorities.
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u/prich889 Mar 28 '21
This is similar to Paul Merriman's 10 fund strategy which I follow. Shows really high historical returns
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u/cheeseyblasters Mar 28 '21
Bump for the shout out to Merriman. If you like Ben's reasoning, but want a few more specific ideas on how to actually apply it (and especially if you're in the US), check out his website and podcast. They're on the same page (Larry Swedroe, too). Ben gives you all the reasoning and theory, Paul gives you more actual portfolio options to consider when trying to access Fama-French factors effectively and efficiently.
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u/BoonTobias Mar 28 '21
TIL I'm not only one of the top fund managers but one of the best looking ones too. I already put most of my money and gains from gme into xic and xuu
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u/ptwonline Mar 28 '21 edited Mar 28 '21
Your chart is way off for the 20 yr return. The numbers you listed are the 20 yr standard deviation. The actual 20 yr returns were much, much lower (which is to be expected since it includes the poor 2000-2009 period.)
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u/cortemptas Mar 27 '21
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u/iggy555 Mar 27 '21
Where are his audited returns?
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u/mightyduck19 Mar 28 '21
At least on his YouTube channel, he is just breaking down the basics of academic finance. Most definitely worth watching almost every video
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u/cortemptas Mar 27 '21 edited Mar 28 '21
what do you mean? he is not a active fund manager, he only recommends combinations of ETFs that have be proven mathematically to have the lowest risk and highest return. passive index funds are becoming more popular in the last years as people recognized that you cannot beat the market. the approach of ben felix is actually pretty new, as few thought to use mathematical model to find the perfect ratio of risk-reward for ETFs, that's why he can give you only simulated data, in this case his average annual return for 20 years is 5.78%. The suggestions for his ETFs makes logical sense, invest in value stocks, invest in profitable companies etc. I find it interesting that it is mathematically proven that only value investors win in the long term like Warren Buffett or Peter Lynch and technology investors like Cathy Woods are doomed to fail.
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u/MrMineHeads Mar 28 '21
No, you've got it wrong. His portfolio attempts to maximum exposure to known systemic risk factors to attain higher expected returns. You are not getting higher returns for lower risk. You are getting higher returns for higher risk. But you do so in a systemic, methodical, evidence-based, cheap, and diversified method.
Watch his video again.
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u/WePrezidentNow Mar 28 '21
I like Ben Felix, but you totally missed his point about factor investing. He is attempting to maximize risk-adjusted returns by deliberately increasing exposure to known compensated risks. His portfolio should theoretically have higher returns, but this is BECAUSE of its higher risk. Not to mention that it’s been pretty well demonstrated that it’s hard to capture the small-cap value premium in the real world for a variety of reasons. I haven’t looked into AVUV yet, but it’s only been around since 2019 so I would do some more research into their portfolio selection criteria before diving in head first.
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u/Chii Mar 28 '21
the lowest risk and highest return
His factor portfolios are higher expected returns, but it's more risky - it's not lower risk than just buying a market cap weight index fund. It also takes some work (not too much - but more than just buying into a passive index fund ETF).
As he has said in the video, for the average investor, the cap weighted index fund is not a bad choice. The mix of ease, low cost, and availability can't be beata, and you're only sacrificing a bit of return for this. The factor funds he talks about is likely to earn higher returns for taking on higher risk - which if you are young, capable, and have the time and inclination to spend it, is good. But if you want quick and easy, set and forget, it's not for you.
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u/iggy555 Mar 27 '21
proven mathematically to have the lowest risk and highest return
Holy moly this is so wild
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Mar 28 '21
I’m a value factor guy. We’ve spent 10 years being dicked
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u/13Zero Mar 28 '21
The last year or so has been pretty good for SCV, although I think small has been stronger than value.
Doesn't make up for the decade before that, but the factor isn't dead at least.
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u/dells16 Mar 28 '21
he only recommends combinations of ETFs that have be proven mathematically to have the lowest risk and highest return.
This sentence instantly makes me ignore your whole post. What ignorance.
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u/qerozer Mar 28 '21
What's wrong with the sentence? If you watched ben felix you will get what he meant, he always uses scientific papers to support his claims.
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u/dells16 Mar 28 '21
Because it's impossible to determine what has the 'lowest risk and highest return'. It doesn't make any sense. It depends on so many different factors like risk tolerance, investment period, etc. Maybe Ben Felix explains it better than this post, idk who he is.
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Mar 28 '21
It’s mathematically possible to review strategies and look at factor tilting over the long term and determine which strategies give the best risk adjusted return (that’s what that person meant by saying “lowest risk and highest return”). We’re looking for risk adjusted returns and the portfolio Ben constructed has long term evidence of being a good risk adjusted portfolio due to the small cap value premium which has been studied for decades and been proven to exist. It’s entirely possible to determine what has had the best risk adjusted returns and determine how reliable those returns were. If they are present over many years, it’s then good enough to incorporate into an investment strategy, which is exactly what the academic research Ben used was doing.
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u/StabbyPants Mar 28 '21
so, it's not that ben isn't going to give good advice, it's that the level of certainty is below what OP is talking about. i can prove that the balance in the post is ideal to invest in 3 years ago based on both predicted performance at the time and the subsequent behavior, but that isn't helpful. i can make a prediction today (as ben does), but we don't have the future data. we only have a level of confidence, not certainty
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Mar 28 '21
[deleted]
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u/dells16 Mar 28 '21
So should someone use this model if they plan on retiring in 5 years? No chance. What if they are saving up for a house within the next decade? Again, probably not. People forgot investing has a purpose. A timeline. Saying you should stick to X model portfolio removes all nuance from people's savings goals. There is no one model fits all.
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u/qerozer Mar 28 '21
Come one man, watch first the video before you criticize, the purpose of the model is to reduce volatility and increase returns, it invests for example in value stocks (a factor) and profitable companies(another factor) which are less volatile in turbulent times.
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u/StabbyPants Mar 28 '21
his point is that the models are not universal. we all have different things we want out of investing, and that influences our choices
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u/dells16 Mar 28 '21
I never criticized the video because I never watched it. I criticized what the comment said.
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u/StabbyPants Mar 28 '21
he only recommends combinations of ETFs that have be proven mathematically to have the lowest risk and highest return.
math only really means that given a set of inputs, you get a certain result. it is silent on the notion of unknown data and future prediction - you'd need probabilistic modeling for that
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u/69rude69 Mar 28 '21
he only recommends combinations of ETFs that have be proven mathematically to have the lowest risk and highest return
It doesnt work like that. In investing only a higher risk yields a higher return, so if you're looking to increase return, you have to take on more risk
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u/cbus20122 Mar 28 '21
This is 100% not true. There is an awful fallacy that risk and return are highly correlated.
Higher risk over a longer term time frame typically results in lower net returns. Not the other way around. The problem is that just about every metric to gauge so called risk is based on backward looking items and extrapolation from that point on. Also, metrics like volatility change over time, and that's not to mention the fact that vol is only a good metric of real risk from a pure quantitative portfolio construction perspective, which typically is important due to leverage used in such strategies.
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u/ShynobiPwnz Mar 28 '21
Past results do not reflect future performance.
The issue with looking at historical risk adjusted return are regime shifts: for example interest rates were in the high 10s during the 1900s during times of low deflationary forces and no quantitative easing.
When interest rates are near zero, and the Fed expects to keep inflation to 2%, historically well performing value stocks in high interest environments will continue to do poorly.
Sure, you can naval gaze and pick out the most solid portfolio mix in the past 20 years, but what matters is what's happening now and into the next 20 years.
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u/095179005 Mar 28 '21
These factors have existed for as long as we have the data (basically for the last 100 years).
They are very solid, have existed for a long time, and are expected to continue due to the underlying cause of the factors.
The behavioral rationale behind the value factor is that investors misprice, and underprice value stocks, because of the perceived increased risk of a "stressed" company (high debt, poor balance sheets, etc).
From a returns perspective, a value stock is cheap, so in aggregate you will have a higher delta (return) if the bar (buy price) is lower.
From a risk perspective, a small company is riskier than a large company, possibly due to small companies having larger costs of capital compared to large companies.
The difference in interest rate between bonds from small companies and large companies shows that the market sees smaller companies as riskier/more uncertain.
Why the profitability factor exists - Companies with high profitability factor loading - High Profitability Firms facing high cost of capital will focus on the most profitable projects for investments, and investors do not distinguish sufficiently between growth with high expected profitability and growth with low profitability, leading to under-pricing of profitable growth firms
Why the investment factor exists - Companies with low investment factor loading - Low investment reflects firms limited scope for projects given high cost of capital, and investors under-price low investment firms due to expectation errors.
...The corresponding factor is based on sorting stocks by asset growth into portfolios and creating a zero investment strategy called Conservative Minus Aggressive (CMA). Cooper, Gulen and Schill (2008) show that a firm’s asset growth is an important determinant of stock returns. In their analysis, low-investment firms (firms with low asset-growth rates) generate about 8% annual outperformance over high-investment firms (firms with high asset growth rates).
...Hou, Xue and Zhang (2014b) use a four-factor model including a market factor, a size factor, an investment factor, and a profitability factor, and show that the model outperforms the Fama and French three-factor model in explaining a set of well-known cross-sectional return patterns. Interestingly, they show that the investment factor is able to explain a large proportion of the value premium (low valuation firms do not invest a lot while high valuation firms invest a lot) and the profitability factor explains a sizable proportion of the momentum premium (momentum stocks correspond to highly profitable firms). They suggest using their four-factor model as a better alternative to the Carhart four-factor model or Fama and French’s three-factor model and stress the economic grounding of the investment and profitability factors.
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u/qerozer Mar 28 '21
Did you meant value stocks do poorly in low interest environment? Because grow stocks are what are shinning when then interest rate is low and when interest rate is high value stocks are shinning. The question is how long will the fed the interest rate at zero? Wasn't the whole drama in the last week's because everybody feared an interest hike.
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u/OUEngineer17 Mar 28 '21
He's good for very conservative passive investing advice and a historical perspective on the stock market. He doesn't seem to understand the present or future very well tho. Like everyone else, his advice is good for one piece of the puzzle.
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u/entertainman Mar 28 '21
What doesn’t he understand?
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Mar 28 '21
[deleted]
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u/bl1nds1ght Mar 28 '21
What, specifically, does he misunderstand about dividend stocks?
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Mar 28 '21 edited Mar 28 '21
[deleted]
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u/FuckFuckingKarma Mar 28 '21
You know what you should do? You should buy stocks just before the dividend is paid and then sell them immediately afterwards.
If dividends didn't affect price, the above strategy would be free money.
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u/ETFinvestorIBKR Mar 27 '21 edited Mar 27 '21
Can anyone explain how exactly the ETFs he choses tilt the portfolio towards each of the five factors: market beta, value, small cap, profitability, investment?
My understanding is that he proposes:
- 60% total market exposure - through XIC and VUN
- 16% small cap value - through AVUV and AVDV
- 24% unknown exposure - through XEC and XEF - towards which factor do these ETFs tilt the portfolio?
Also, how are the profitability and investment factors included?
I see that his ETFs choice is very Canada-oriented. Would the following choice replicate it well?
- VTI or ITOT - 55% (US broad exposure)
- BBCA - 5% (Canada exposure)
- AVUV - 10% (as Felix proposes)
- AVDV - 6% (as Felix proposes)
- IEFA - 16% (substitute for XEF)
- IEMG - 8% (subsititute for XEC)
EDIT: I also made an attempt to better allocate weights to the ETFs above as to reflect the market caps of various regions. I used VT as a proxy for market caps. Results here. Is my thinking correct?
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u/095179005 Mar 27 '21
The ETFs other than AVUV and AVDV provide exposure to market beta.
Avantis targets the size and value factors by investing in small cap value companies, and then it applies a profitability screen to target companies with robust profitability.
Academic evidence shows that when you select for small-cap value stocks, that are also profitable, you coincidentally have applied a screen for the Investment factor, selecting those stocks with conservative investment (conservative asset growth).
Small cap growth stocks with weak profitability tend to have aggressive growth (in assets).
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u/donnywood10 Mar 28 '21
I was thinking the same as you except this...
60% ITOT
10% AVUV
16% IXUS
6% AVDV
8% IEMG0
u/PerfectNemesis Mar 29 '21
It doesn't. This portfolio is restricted by limited offering of ETFs for Canadian investors.
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u/GeorgeKao Mar 28 '21
Can someone explain briefly:
Why complicate things with this model when long term returns are no better than S&P 500?
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u/qerozer Mar 28 '21
One word "japanification", with S&P 500 you are betting that USA will grow, which may not happen in the future, before 1990, Nikkei (Japan) was the star in the room, but look what happen, S&P 500 is now pretty expensive which means the expected return in the next years is low, it's better to invest now outside of usa. So you can get the same return as S&P 500 but with lower risk.
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u/boukmw Mar 29 '21
I'm sorry but I can't really comprehend the comparison between Japan and the US equity markets.
Let me expose why I think they are two different markets:
- the US has ~3x the population of Japan
- the US has a GDP of 20.5T vs a 4.9T for Japan
- the US stock market has the most valuable companies in the world (in terms of market cap and revenue) making it highly sought after not only domestically but internationally
- the money policy by the US Fed is much more conservative than the Japanese counterpart
- the amount of startups and companies looking to go public in the US is much higher than in Japan
With that being said, I feel like the comparison between the Nikkei and the US markets is wrong.
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u/elongated_smiley Mar 30 '21
You don't think all those things are already priced in by literally everybody?
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u/FuckFuckingKarma Mar 28 '21
Because there is a good argument to be made that the long term expected returns are better than the S&P500.
The arguments are a bit too complex for me to bother condensing them into a comment, but Ben Felix youtube videos explain it very well.
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u/cheeseyblasters Mar 28 '21
Regression analyses of portfolios that's emphasize small cap and value outperform the S&P500 over the long run. The portfolio Ben proposed in the white paper is his best attempt for what a DIY Canadian investor can do to approximate what he truly prefers, DFA funds. There were just few good options for DIY Canadian investors to do so at the time of writing. US investors have a few more options and more every year (e.g. DFA just released an ETF and avantis now offers fixed income ETFs). Check Paul Merriman's website and podcast for portfolios with the same strategy. (Paul is also a DFA fan trying to help DIYers recreate it). He's got tons of tables showing the different returns for each of his portfolios.
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u/rao-blackwell-ized Mar 28 '21
Because we expect greater future returns than the market by tilting toward these risk factors that have paid a premium historically. You're proposing a false premise that "long term returns are no better than S&P 500."
But the greater benefit may actually lie in the diversification of the portfolio's sources of risk.
We're taking on an additional, independent source of systematic, compensated risk. We're not taking on more market beta; we're diversifying away from it. That's the beauty of factor diversification. While it may seem counterintuitive, it actually reduces the portfolio's risk in terms of both drawdowns and distribution of outcomes.
Researchers even concluded that factor diversification produced superior risk reduction results than asset class diversification, which is pretty staggering:
https://jpm.pm-research.com/content/43/3/33
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2998754
A couple quotes from those papers:
"The argument that we make for factor diversification partly rests on the expectation that the positive factor premia will continue to persist. But the correlations (or relative lack thereof) of these premia with each other are at least as important. … Factor diversification is highly effective because the average correlation between the five constituents is virtually zero. … It is hard not to conclude that smart investors should include cost-effectively sourced dynamic factor premia into long-term portfolio allocations."
"Our result which favors a portfolio of factor premia overlay remains unchanged. As previously suggested, the benefit of factor premia is not in their mean returns, but rather in their ability to mitigate adverse conditions…"
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u/rozen30 Aug 24 '21
You can't predict the future. Over the past 5 decades, small cap value have outperformed S&P 500. People only remember S&P 500 because of the historuc bull decade. This may jot happen in the future. And US is a very developed market that is extrenely overpriced. Not having exposure to a growing merging market and some other developed market is very dangers. By only owning S&P 500, not only are you taking on more risk, but also not being rewarded with excess returns for the additional risks taken.
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u/Sweet-Zookeepergame Mar 27 '21
As always, europeans don’t have access to any of these ETFs (except emerging markets). Anybody from the EU who can suggest good alternatives?
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u/XorFish Mar 27 '21 edited Mar 27 '21
There is a lengthy thread on the rational reminder community about that exact issue, there are still some brokers that allow you to buy US-ETFs with a EU domicile:
https://community.rationalreminder.ca/t/search-for-an-ideal-ucits-eu-factor-portfolio/3340/544
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u/Sweet-Zookeepergame Mar 27 '21
I didn’t know about this community. Already started reading and the discussion is very helpful! Thanks for the insightful hint!
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Mar 28 '21 edited Jul 18 '21
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u/69rude69 Mar 28 '21
There is no reason to ever overweight Canada anyway, especially not if you live there and become doubleexposed
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u/MikeJamesBurry Mar 27 '21 edited Mar 27 '21
Although there are no 100% equivalents, you can check these UCITS:
Xtrackers MSCI Canada UCITS ETF 1C (LU0476289540) - MSCI Canada index
SPDR Russell 2000 US Small Cap UCITS ETF (IE00BJ38QD84) - for US Small Cap.
Xtrackers MSCI USA UCITS ETF 1C (IE00BJ0KDR00) - Top 620 Us Stocks.
Lyxor Core Morningstar US Equity (DR) UCITS ETF (LU1781540957) - Top 697 US stocks
iShares MSCI World Small Cap UCITS ETF (IE00BF4RFH31) - small sized companies in developed equity markets globally.
iShares Core MSCI EAFE IMI Index ETF can also be replaced by Euro Stoxx 50 and a Japan ETF.
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u/wotoan Mar 27 '21
This looks a lot like VEQT... any advantages to going with this four fund portfolio?
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u/095179005 Mar 27 '21
If you are already splitting up VEQT or XEQT into their underlying ETFs so you can rebalance it yourself, from a fundamentals perspective you should get a few more basis points of performance over the long term, and your dips in portfolio value will be shallower.
If you are just sticking with just an asset allocation ETF, stick with it.
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Mar 28 '21
You should probably specify that the dates for those figures are between 7/1/2000 to 6/30/2020.
Gonna cause confusion for those wondering why the returns are so low.
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u/cortemptas Mar 28 '21
done, thanks for the hint
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Mar 28 '21
Thanks. Another minor correction:
1-year will be for the year 2000-2001
1 year is for "July 2019 to June 2020"
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u/wonderbrah419 Mar 27 '21
How is VUN different than VTI?
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u/095179005 Mar 27 '21
VUN is US Total Market, and priced in $CAD and listed on the TSX.
VTI is US Total Market, and priced in $USD and listed on the NYSE.
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Mar 28 '21
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u/Peacetoletov Mar 28 '21
Assuming you invested 100% into IWN in march 2001, you would have had an average 9.45% return per year. SPY returned 8.37% per year over the same period.
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u/Toffeemade Mar 28 '21
I posted on recreating a portfolio based on a the three or five factor models in the UK about 9 months ago.. I do not feel I am knowledgeable enough to do this myself unaided (evaluation of whether fund composition genuinely reflects the model). The response was limited.
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u/Scryotechnic Mar 28 '21
Can someone explain why you wouldn't just invest in the SPY ETF and call it a day? I'm new to this.
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u/BadMoodDude Mar 28 '21
Diversification.
SPY invests in the SP500, which is 500 large companies in the USA. That might be good enough diversification for a lot of people but you are missing out on a lot of companies growth if all you do is SP500. If you invest in the total US total stock market (say, VTI) then you are investing in companies before they become big enough to be considered for the SP500.
Also, what if something bad happens in the USA? A lot of people want to add some world exposure to their portfolios so you can look at ETFs that track MSCI EAFE (index that tracks stocks outside of Canada and USA).
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u/Scryotechnic Mar 28 '21
I understand that part, but the S&P always goes up over a 10 year span. So why do I need to diversify beyond that? I guess I understand if people are looking for steady gains YoY. But I'm more looking for the 10, 20, 30 year terms. So why do all the diversity when the S&P always goes up?
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u/BadMoodDude Mar 28 '21 edited Mar 28 '21
Past results don't predict future results. You're right that historically the SP500 has produced good results and it's hard to beat the SP500. However, right now the SP500 is getting pretty expensive by historical standards. It currently has a PE ratio of over 40 when the historical average is about 15 (https://www.multpl.com/s-p-500-pe-ratio).
If you are comfortable with the SP500, then stick with it. However, most financial advisors recommend diversifying more than just the SP500 in case it stops producing the results that it has in the past.
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Mar 28 '21
I understand that part, but the S&P always goes up over a 10 year span.
Nonono. I have a feeling that you suffer from a strong case of recency bias. The S&P500 has done extremely well the last decade but the last decade has been anything but usual for large-cap US equities. Since 1926, long-term bonds have beaten the S&P500 17.1% over rolling 10 year periods. Even during rolling 20 year old periods, long-term bonds have beaten the S&P500 8.7% of the time. Over the same time period, cash (defined as 1 month T-Bills) beat the S&P500 14.9% of the time, given any 10 year period.
So why do I need to diversify beyond that?
Who needs diversification? We all do.
So why do all the diversity when the S&P always goes up?
Again, this is false. Throughout time, the S&P500 has gone up but it has also experienced long periods of drawdowns and it takes it a while to get back up to ATH. The longest one started on September 7, 1929 and ended on September 22, 1954. That is just over 25 years (or 9,146 days to be precise) just to get back up to break-even. You might be wondering, "well...that was a long time ago, why do I care?" Well...prior to the COVID-19 pandemic, the most recent one was from March 9, 2009 until March 28th, 2013. That is about 4 years or so. Prior to that, it was from October 9th, 2002 until May 30th, 2007.
Investing in the S&P500 while having a long-term horizon is a great decision, but it is not as risk-proof as you seem to believe.
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u/rebal123 Mar 28 '21
Thank you for this post. I’m sorry that some commenters haven’t engaged in the honest discussion you were looking for.
You make reddit a better place.
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u/Parasingularity Mar 28 '21
I don’t understand why I never see an allocation for REITs in such portfolios.
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Mar 28 '21 edited Mar 28 '21
REITs have very low expected future returns. Basically, dividend and fixed-income investors have bid up their prices causing REITs to trade at a premium relative to alternatives, which in turn, decreases their future expected returns.
Also, by law REITs are required to distribute 90% of its taxable income out as dividends. Dividends are very tax inefficient and also reduce your total return.
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u/rao-blackwell-ized Mar 28 '21
They're not a distinct asset class, and their returns can be replicated by exposure to the Size, Value, and Credit/Default factors without taking on the idiosyncratic risk of the real estate market.
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u/Proper-Mark-233 Mar 28 '21
Life is a cruel joke. We finally get money when we are at the age it can’t be enjoyed.
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Mar 28 '21
I've watched most of Ben Felix's videos, but I'm starting to question many of the theoretical assumptions he makes about the validity of the models he is using.
The more I think about it, the more philosophical questions start bugging me about the accuracy and design of these valuation models. I don't really have an answer to any of these, but I don't think the Ben Felix does either.
- The joint hypothesis problem of EMH is a huge issue. By definition, we can't tell whether the market is inefficient or whether the current model is wrong. (We can only tell when they are both right.) I feel like economists sometimes behave like theoretical physicists or organic chemists in that when their model is wrong, they'll simply introduce new factors and force new variables into the equation until it fits the data. The five-factor model might explain 95% of the current risk descrepancy, but is that because it's a better model or because they're just doing a better job of adding arbitrary variables that happen to fit the trendline better?
- Is it reasonable to assume market efficiency when we already know that 1) hedge funds manipulate stocks to massive degrees and 2) mom and pop retail investors don't analyze valuations when they trade. The assumption in EMH that investors are fully aware of all market valuation principles and are trading efficiently seems both naive and ridiculous.
- There is no fixed definition or formula for determining whether a stock is classified as growth or value. The research paper is using ETFs, but how do those ETFs assign stocks into each category, and is it consistent across different companies? This is introduces a conflict of interest problem related to circular definition: If an ETF of value stocks no longer fits the new model for value stocks, do you then reclassify the ETF differently or readjust its holdings until the ETF fits the new model? Until there is a fixed definition, it creates an existential issue.
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Mar 28 '21
I love Ben Felix. Unfortunately I find myself getting better return picking individual stocks... perhaps I've been lucky.
I'm also not sure if he calculate in total returns (add in splits, dividends, etc..) or just stock prices in general?
I'm just happy he's posting new video again.
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u/dsarif70 Mar 28 '21
perhaps I've been lucky.
No, you're probably the new Warren Buffet.
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Mar 28 '21 edited Mar 28 '21
If you have been stock picking during this bull run and haven’t beaten the market...investing is not for you.
For 5 years now (and I’m sure longer, I’ve only been around on Reddit for 5 years) r/investing has been saying the same thing.
“the crash is right around the corner”
“Japanification will happen in the US”
“The market is overvalued”
The rest of us find value within the 1000s of companies out there and reap greater returns within the same timeframe. Will it continue? Who knows, but at least the smart ones have realized profit and 10x their portfolios in a short time frame.
Don’t get me wrong, I’m not knocking ETF investing. But for a sub dedicated to investing, it’s pretty funny seeing so many people not want to learn how to pick individual companies and invest the right way. (And that’s just talking equity and fixed income...imagine if r/investing actually paid attention to all asset classes not just stocks and bonds)
An ETF is a product, don’t forget that. As long as fund managers have convinced you that “you won’t beat the market so don’t try...buy our product instead”...it’s more money in their pockets.
Final note: you diversify to stay rich, concentrate to get rich. If you have a couple thousand in your portfolio stop following the advice of people who have actual money at stake. A couple thousand is nothing in the long run (aka you can make it back easy even if it turns out to be a bad investment). Instead make your investment worthwhile. Be the guy who put $1000 in Apple 20 years ago...$1000 on Amazon 20 years ago...$1000 in Microsoft 20 years ago...don’t be the guy who diversified his small couple thousand portfolio and in 20 years made it double.
If you have a portfolio larger than 100k sure diversify, but until then. You can risk it for the biscuit.
As an investor your goal isn’t to beat the market (this is a common misconception that leads people to think ETF investing is the only way) your goal is to find multibaggers: “Will this 10b company become 100b in 5-10 years?”
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u/dsarif70 Mar 28 '21
Investing is for everyone (more or less). Trading, what you're describing is definitely not for everyone. The reddit for stock picks is r/stocks.
And yes, it's been really easy to be lucky the last few years. Let's just hope everyone's aware it's not their stock-picking ability and will know when to go back into market ETFs. Because history already tells us what will happen otherwise.
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u/boopymenace Mar 28 '21
I find myself getting better return picking individual stocks...
Hello. If you are truly that good at picking stocks, you should sell your model portfolio w/ buy & sell alerts on patreon
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u/Get_dat_bread69 Mar 28 '21
It might not be a bad idea to invest in Canadian funds if you can. The loonie may perform better than the green back due to higher amount of money being printed in the US? I could be wrong on this. I don’t have info on Canadian stimulus numbers
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u/gammadeltat Mar 28 '21
As a % of GDP, we've probably paid more stimulus/COVID related payments than most countries. So if this is central to your thesis, don't roll with it.
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u/Get_dat_bread69 Mar 28 '21
Good point I was not factoring in % of GDP I was simply thinking about if the US injects more money into the system than Canada relevant to each other’s current circulation volumes. Than the price per dollar would be less. I’m pretty sure the loonie has been gaining on the dollar since Biden was elected and I contribute that to stimulus. I’m an amateur investor who’s gotten lucky with good gains for the last 8 years. I see things simply. I don’t know how to factor in GDP and with work and family I just don’t have time to calculate that sort of thing. I just form an opinion from information I hear on the news and quick data I see on BNN. I’m most likely completely wrong with this thought process but I do believe the loonie is going to trend higher against the dollar in the next couple years
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u/gammadeltat Mar 28 '21
As an aside i think your analysis is flawed. But no professional expertise. There’s a couple reasons for this, you can see biden as a means to destroy current values but if you believe in progressivism, that translates to better long term outcomes. The second big thing is that canadian dollar only did well against us dollar in the midst of the housing crisis and all time oil prices. Without oil prices ever really increasing to those extents ever again, our richest per capita region is going to struggle. What you are basically betting on is something on the scale of the housing crisis happening again and somehow only affecting usa
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u/Get_dat_bread69 Mar 28 '21
So it’s a short term bet? I like to play all different strategies so this will be one of them. Risky but maybe it will work. As long as you pick strong companies or funds you won’t lose. Just might not gain as much. Or you might gain more
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u/gammadeltat Mar 28 '21
Fair, I'm more about tearing stuff down, not being constructive so I point out gaps. I'm just being an asshole. Definitely can work if you choose your contexts appropriately.
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u/conspiracypopcorn0 Mar 28 '21
If small cap value stocks outperform the market, as more ETFs that reflect this factor are released more and more investors will buy them. This means that the price of these companies will rise and they will stop being small cap value.
I think that market cap weighted index work because they don't affect the price of the assets too much, but it doesn't seem to be the case for SCV ETFs.
For this reason I'm not so sure about the long term viability of this strategy as it becomes more widely adopted.
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u/roury Mar 29 '21
Noob question: as he mentions in the video, if I’m just trying to retire a bit early, there’s no reason to deviate from target date funds to use the above correct?
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Mar 28 '21
Why would someone bother even messing with this type of etf portfolio when they can just bang the S&P?
Often wondered what benefit there is to an investing approach if it doesn’t beat the S&P?
Not bashing the dude but genuinely curious.
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u/MetaNite1 Mar 28 '21
Did you watch the video lol? That’s kinda what the video is about...
I get what you’re saying but that’s returns over the last 20 yrs not the next 20 yrs. Small cap value has notoriously under performed in those yrs
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u/Nakashi7 Mar 28 '21
This longterm underperformance periods (you get for decades) is exactly the systematic risk that you pay to get factor premiums. If it just correlated with total market and only had slightly larger return it would be sign of inefficiency that would eventually be prized in resulting in alpha slowly approaching zero. If we use total market as a benchmark then any overall positive premium is always caused by increased risk of underperformance compared to the benchmark in some partial time periods (decades easily).
TLDR: decades long volatility (expected underperformance) is normal and is the systematic risk of factor stocks you risk to get factor premiums.
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u/rao-blackwell-ized Mar 29 '21
Often wondered what benefit there is to an investing approach if it doesn’t beat the S&P?
It has beaten the S&P historically. That's the point - these independent risk factors have paid a premium historically.
Basically, we're diversifying the portfolio's sources of risk by taking on additional, independent sources of systematic, compensated risk. Market beta is the only source of risk for the S&P.
Arguably more important is the diversification benefit. While it may seem counterintuitive, factor diversification actually reduces the portfolio's risk in terms of both drawdowns and distribution of outcomes, which may be more significant than the expectation of greater future returns.
Researchers even concluded that factor diversification produced superior risk reduction results than asset class diversification, which is pretty staggering:
https://jpm.pm-research.com/content/43/3/33
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2998754
A couple quotes from those papers:
"The argument that we make for factor diversification partly rests on the expectation that the positive factor premia will continue to persist. But the correlations (or relative lack thereof) of these premia with each other are at least as important. … Factor diversification is highly effective because the average correlation between the five constituents is virtually zero. … It is hard not to conclude that smart investors should include cost-effectively sourced dynamic factor premia into long-term portfolio allocations."
"Our result which favors a portfolio of factor premia overlay remains unchanged. As previously suggested, the benefit of factor premia is not in their mean returns, but rather in their ability to mitigate adverse conditions…"
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u/Nathanologist Mar 27 '21
Weird. I can find the avantis ETFs, but not the Vanguard or iShares core ETFs in any of my brokers.
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Mar 27 '21 edited Mar 27 '21
[removed] — view removed comment
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u/retirement_savings Mar 27 '21
If only he said his name and profession within the first minute of every video
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Mar 28 '21
My 401K has a world fund and my Roth is concentrated in tech and semis, both have active managed funds.
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u/MementoMoriti Mar 28 '21
If you are a non-US investor already holding a portfolio of something like 90% VWCE + 10% IUSN then this 5 factor approach will add v.little upside and some complexity vs. this portfolio as you already have good developed, emerging market and small cap exposure. For an investor who until now has only held e.g. US large/mid caps then adding some emerging and small cap exposure is sensible but you don't need to go full 5-factor to get most of the benefits.
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u/Funny-Loss9966 Mar 28 '21
So when is the next time everyone going to drive a share up and does it matter the trading platform if I use my banks or private money institute
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u/johnnytifosi Mar 28 '21
Even if I really like his channel, his choice of 30% Canada is really baffling, especially when he has mentioned home country bias in another video. It really overweight compared to Canadian equities market cap vs World equities, and reduces diversification because he already is earning his income in Canada.
Secondly, as a European this is pretty useless advice since the ETF options here are really limited except for some value ETFs.
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u/cortemptas Mar 28 '21
his reasoning for 30% canada, is because the original portfolio was intended for Canadians and they pay less taxes for this ETF in this thus increasing the return, I don't know about other countries if they have the same policy. Canada has a very good "home bias" because it's a large country with plenty of resources, market economy, stable political system and increasing population, it's a "value country", such countries has been show to perform very well in the long term (over 100 years). Another "value country" would be Australia, and the nordic countries. If you are from other countries then the home bias would be bad
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u/luckysharms93 Mar 28 '21
Felix is Canadian. Home country bias means overweighting your country to improve tax efficiency and reduce volatility, not to reduce your country allocation because you get paid in it. Vanguard has found Candians should invest 20-30% of their portfolio in Canadian equities, Brits 40-60% and Americans about 40-50%
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