Here at Silicon Hills Wealth, we focus on engineering investment portfolios that efficiently capture market premiums and manage the risk our clients are taking. Factor investing is a quantitative way to visualize what dimensions of the global stock market an investor holds. We have covered what we mean by “Dimensions” of return in prior articles located here. Below are 3 known dimensions of higher expected returns that investors should pursue within their portfolios:
We will highlight the three “core” holdings we use within portfolios here at Silicon Hills Wealth. The term “core” simply states that the fund targets the broad market and does not remove or avoid a given segment of that market. We can see that so far here in 2022 year-to-date (YTD), our core holdings are outperforming their assigned benchmarks on a relative basis.
We can further analyze these 3 core ETFs by combining them into one portfolio and weighting them accordingly to match the Vanguard Total World Stock ETF. Note, nothing against Vanguard here; they simply have one of the leading total stock market ETFs at an attractive management fee with little tracking error to the benchmark, so it is a good choice for this exercise. By doing so, we can compare a portfolio comprised entirely of the 3 core ETFs against a completely passive index fund with no active management applied.
We can now determine if the active touch Avantis applies in the construction of their funds has provided any substantial difference in performance YTD in 2022 over the passive index fund. Remember, Avantis does not forecast whether markets will rise or fall, nor do they analyze individual stocks; they simply target known dimensions of higher expected returns based on decades of academic evidence.
|Vanguard Total Market||Silicon Hills Wealth Core ETF|
The factor “loadings” of the three Avantis ETFs have materially impacted performance. Apart from March, the factor-based ETFs were able to outperform the passive index benchmark fund. What is the driver of this performance difference? It really does come down to what you own and we can use tools to analyze what dimensions or characteristics of the market we have exposure to in our portfolio. The table below quantifies various characteristics of our core ETF model compared to the passive Vanguard ETF index fund.
A Difference Maker:
Above1, we can see how the Silicon Hills Wealth “core” ETFs hold up against the passive index ETF used in our analysis. A higher percentile score is better for this exercise. We can clearly observe that the Avantis funds are obtaining more cash flow, profits, and earnings per $1 invested in the market compared to the overall passive index fund.
The term “management” within portfolio management is centered around managing risk, not return. Most investors focus too much on returns while ignoring the risks they are taking to earn them. We can improve upon a pure passive approach to owning the market by tilting our portfolios into known dimensions of return while taking taxes and trading costs into consideration. By using factor-based funds such as those provided by Avantis Investors®, Dimensional Fund Advisors and Alpha Architect we can further diversify our portfolios to maximize returns per unit of risk taken. Pay attention to the small details, over time they can add up.
1Underlying data are from FactSet and individual stock observations are windsorized at the .5% and 99.5% level Portfolio factors are holdings-weighted and derived by Alpha Architect Factor ranks are based on the the underlying portfolio factor value ranked against the universe of all portfolios tb.at have data available for a given factor. Ranks are from 0% to 100%. Higher is considered more favorable; lower is considered less favorable. Size, Beta, Volatility, and Asset Growtb. ranks are inverted to reflect the empirical evidence tb.at higher is generally considered less :favorable from an expected returns 5tandpoint. Custom Factor Rank is a weighted average of the other five ranks, where the weights assigned to each factor are determined by the Custom Factor Weight inputs (available on the right panel).
Disclaimer: This document may contain forward-looking statements and projections that are based on our current beliefs and assumptions and on information currently available that we believe to be reasonable. All statements that are not historical facts are forward-looking statements, including any statements that relate to future market conditions, results, operations, strategies or other future conditions or developments and any statements regarding objectives, opportunities, positioning or prospects. Forward-looking statements are necessarily based upon speculation, expectations, estimates and assumptions that are inherently unreliable and subject to significant business, economic and competitive uncertainties and contingencies, and prospective investors may not put undue reliance on any of these statements. Forward-looking statements are not a promise or guaranty about future events.
It should not be assumed that recommendations made in the future will be profitable or will equal the performance stated herein. The information provided does not constitute investment advice and is not an offering of or a solicitation to buy or sell any security, product, service or fund, including the fund being advertised.
The statements herein are not intended to be complete or final and are qualified in their entirety by reference to the Investment Management Agreement. In the event that the descriptions or terms described herein are inconsistent with or contrary to the descriptions in or terms of the Investment Management Agreement, the Investment Management Agreement shall control. In making an investment decision, you must rely on your own examination of the Investment Management Agreement.