The Factor Barbell

@TypicalMatt5 Top 10 holdings differences between AVLV and DFLV respectively. Avantis profitability filters harder on cash-based operating profit jointly with P/B. DFA screening seemingly a little more traditional value-like (e.g UNH)

@BarbellFactors Any insight/thoughts on the performance differences between $AVLV & $DFLV ?

“Value and momentum are negatively correlated” is a long/short result only for HML vs UMD, both market-neutral. Strip out market beta and the styles move closer together. With long-only funds, the shared beta drags it back up. Last 10 years: SPMO vs DFLVX 0.70. Never negative.

@IndepBets CTA is very diff relative to SG CTA index, since they only trade commodities and rates. I think they strip out equities and currencies. They were heavily positioned long Oil pre-and-post Iran Hormuz closure. Since then it’s reversed. At one point up +15% YTD but now -1% YTD.

Managed Futures ETFs YTD: 11 of 12 funds positive. $RSSY +32.2% and $TFPN +17.4% lead; $CTA -4.7% lags. Benchmark $DBMF +9.4%. A 37pt spread across 12 funds.

@TypicalMatt5 If you’re strictly worried about US Large Cap Value relative outperformance, then $AVLV is the objective winner. But this is a short 3.5 year backtest since inception of AVLV. Hard to say if it’ll continue but I have faith in Avantis’ methodology. Both beat Vanguard Value ETF.

@QuietProsperity @benjaminfelix @OptimizedPort @egr_investor @HML_Compounder @dollarsanddata @awealthofcs Totally agree, I would never advocate anyone be 100% US Small Cap Value. This post was illustrative of a more important point that S&P 500 isn't the only game in town on a total return basis. But a sensible allocation to US SCV for diversification always makes sense to me.

@BarbellFactors @benjaminfelix @OptimizedPort @egr_investor @HML_Compounder @dollarsanddata @awealthofcs Agreed in that sense that Avantis seems to run good funds. But I think most folks view it from a different perspective. If it doesn't offer something better, why do it? And as always, being 100% any single factor just doesn't make sense to me. LCG + SCV would have been solid.

Imagine DIY retail investor in 2019 was told they should invest 100% to US Small Cap Value & NOT participate in the mega-cap tech & AI. That would be a no-go for many. Yet in fact, $AVUV (a systematic multi-factor US SCV approach w/flexible trading) has matched or exceeded VOO.

@choffstein This could work… trading 25% SCV factor purity for R2K beta exposure is a reasonable price if allocators are capital constrained and would otherwise not access trend at all.

@BarbellFactors So... 75% AVUV 25% R2K futures 100% managed futures ?

New return stacking fund from kurv. Currently uses a mix of ETFs + synthetic exposure (via flex options) to get ~100% exposure to the S&P 500. Then uses freed up cash to get exposure to munis via ETFs. Back of the envelope, I'm seeing ~100% S&P 500 + 60% Munis. They've filed for the same idea with small-caps, international equity, european equity, japanese equities, and EM equities.

@the_green_lark How might it change with different Momentum implementations? 12mo-1mo, 6mo (including recent month), monthly reconstitution vs semi-annual vs annual? Quality filtered momentum, etc.

Momentum performance during major bubble periods: Let's average the great depression, the dotcom bubble, and the great financial crisis. Averaged momentum (blue) is stable and doing great both during the bull runup and the crash phase. The big risk is the reversal at the start of the rebound phase, where momentum crashes sharply. (the time axis here is rescaled to have aligned and equal parts bull, crash, rebound phases)

@jaykaeppel @SystematicIRE US stocks? Global stocks? International stocks? Small cap stocks? Value stocks? Momentum stocks? Low Vol/Low beta stocks? Quality stocks? What is the benchmark? Money can be made relative to a flat benchmark depending on allocation. Bonds, gold, managed futures still exist too.

Here are the relevant questions. Picture the stock market goes sideways the next 10-15 years. a) How will you make money? b) Are you SURE your faith in the market "eventually coming back" will keep you fully invested? c) Are you SURE that's what you want to do? Think about it.

@Greenbackd How exactly are Momentum & Quality being defined here?

The other time was 2000. Big bounce back in response.

Underlying holdings are not traditional value names one would expect: $AVLV has only a 28% overlap with $VTV. Inside $AVLV are names like Micron, Apple, Amazon, Meta, Qualcomm, Lam Research, Caterpillar, Microsoft, Netflix.

This is a good reminder: despite the "Value" in Avantis US Large Cap Value ETF $AVLV, it's not a simple P/B or profitability sort. Weightings rise with a stock's expected return... cheap and profitable together. $AVLV has outperformed $VOO on a total return basis since inception.

I’ve previously looked at $IMOM, but I can’t ever commit. Are there any solid systematic competitors?

Been loving the systematic process of $FMTM US Momentum ETF. 6-mo look back, reconstituted monthly, and a quality screened filter. It pairs exceptionally well with $SPMO for US Large Mo. But I’m finding it hard to find a complement pair to $IDMO in developed ex-US. Any thoughts?

@jf10977 @PFOInvestor And THIS is the exact reason one has to commit to holding systematic Small Cap Value (Avantis-style SCV) in their portfolio at all times if they want to harvest the premium. Because it is extremely hard to time that clustered outperformance

@PFOInvestor @BarbellFactors Outperformance clustering around certain periods can be explained. During drawdowns continuous scoring tilts toward the highest implied discount rates at post crash prices. The strategy enters recovery with better starting valuations than before the drawdown.

x.com/CNBC/status/20… I hear a lot about how horrible the Russell 2000 is. Yet, even in this small cap rally, the Russell indicies are outperforming DFA's "evidence based strategy." How many times was I told that when small caps start to outperform then DFA will shine...unfortunately shareholders are still waiting, while paying higher fees to underperform. Chart shows: R2K vs DFA funds (SC, SCV, SCG)

@PFOInvestor 1. $FMTM is much less mega-cap/tech overlap with SPMO. 6-mo lookback instead of 12mo-1mo. Equal-weight. Monthly rebalance. 2. $BSVO : Active manager diversifier for AVUV basically. Bridgeway similar philosophy but ~32% overlap with AVUV and also is even smaller cap / micro cap.

@BarbellFactors Overall well balanced Mom+ HmL barbell strategy. Interesting choices. What made you choose FMTM, and BSVO, vs the alternatives?

@PFOInvestor I have 50 US, 30 DM, 20 EM, and I aim ~30% momentum and ~70% value relative to each. But Emerging Markets is the most challenging for me to allocate. I like 20% as an overweight, also $FRDM as a proxy equivalent of SPMO but in EM since it's 35% $TSM, Samsung, & SK Hynix.

@PFOInvestor I have tinkered lots, the best portfolio I can stick with is a global factor barbell of diversified value + momentum. I'm still in accumulation phase. US: $SPMO 10% $FMTM 10% $AVLV 10% $AVUV 10% $BSVO 10% Developed ex-US: $IDMO 10% $AVDV 20% Emerging: $FRDM 10% $AVES 10%

@PFOInvestor Actually R² of 97.7% on Avantis factor regression means it’s statistical proof that almost no idiosyncratic risk exists in this return stream. I agree DFA has a less than ideal go to market distribution strategy. I’m also not a proponent for entirely SCV, I only hold 10%-20%

I did six months because thats what the story is about. I didnt pick it, they did. But the point remains as I stated in the OP. DFA runs a market cap framework with factor overlays. It is essentially, an index plus model that lies somewhere between active management, and passive management, but charges a premium fee. Instead of starting with a cap weighted index universe and tilting it, Avantis uses a proprietary optimization model that assesses a stock's market price against its fundamental cash based profitability, and weights by factor. It is full on active management. I review their structural differences because it is important to understand before we dive into the regression. When we look at the regression from the period you are analyzing we see that Avantis achieved its returns from taking on more market risk, and capturing significant alpha driven by idosynchratic returns. In other words, part of it is compensation for additional risk, and the other part, they got lucky. Also, it isn't 6+ years. It outperformed other small cap value indicies in 57% of periods since inception mostly driven by 2021. However, vs the total market it outperformed only 50% of periods, and this number was also skewed by 2021 results. Without that outlier, they would have massively underperformed. Not debating that they have an interesting and appealing strategy, but it is active management, and this is why I didnt include them in the analysis. They also have a different distribution strategy that does not target using their own proprietary FA's that sell investors a story about factors.