This is more of an open question rather than a true assertion given I have not done any extensive research but rather took a quick look as to how SPY (or any S&P 500 market cap weighted) correlates on a monthly basis to well known factor based ETFs.
My motivation was two fold:
- Gauge whether factor based investing was worth the extra fees compared to a low-cost or even zero-fee S&P 500 plain ETFs.
- Assess whether the investor held any hedge to market cycles by holding specific factors like value, momentum and low-vol.
Notice-1: I have mixed factors defined by industry standard and academia since those tend to differ in implementation.
Notice-2: This is not an exhaustive research
Factors I have used:
- Momentum - MTUM and QMOM (academic)
- Value - VLUE and QVAL (academic)
- Quality - QUAL
- Low Volatility - USMV
Results
Period: 01/01/2016 - 03/31/2019
| Ticker | VLUE | MTUM | QUAL | USMV | QVAL | QMOM | SPY | Annualized Return | Daily Standard Deviation | Monthly Standard Deviation | Annualized Standard Deviation |
|---|---|---|---|---|---|---|---|---|---|---|---|
| VLUE | - | 0.74 | 0.92 | 0.73 | 0.89 | 0.82 | 0.94 | 10.60% | 0.90% | 3.86% | 13.37% |
| MTUM | 0.74 | - | 0.88 | 0.82 | 0.62 | 0.82 | 0.88 | 15.50% | 0.96% | 3.52% | 12.19% |
| QUAL | 0.92 | 0.88 | - | 0.88 | 0.82 | 0.85 | 0.98 | 12.34% | 0.80% | 3.24% | 11.23% |
| USMV | 0.73 | 0.82 | 0.88 | - | 0.63 | 0.65 | 0.88 | 13.35% | 0.64% | 2.63% | 9.12% |
| QVAL | 0.89 | 0.62 | 0.82 | 0.63 | - | 0.73 | 0.83 | 9.69% | 1.03% | 5.08% | 17.60% |
| QMOM | 0.82 | 0.82 | 0.85 | 0.65 | 0.73 | - | 0.83 | 7.23% | 1.23% | 5.02% | 17.40% |
| SPY | 0.94 | 0.88 | 0.98 | 0.88 | 0.83 | 0.83 | - | 12.77% | 0.82% | 3.24% | 11.24% |
What stands out to me is the following:
- Everything has high correlation to SPY, even the factors implemented according to academic standards.
- Everything besides SPY has higher volatility. The exception is Low-Vol. That being said, Low-Vol was measured during a strong bull market period so perhaps this is a wrong assertion.
- Quality and Value have the highest correlation to Market Cap weighted compared to Momentum. I didn't expect that. Not sure how to explain this yet.
- Quality and Value are highly correlated. Not a surprise.
- Academic and Industry factors behave similarly overtime. Could the difference and effect of academic factor under-performance be linked to the strong bull market period?
What do you guys/gals make of it? is S&P 500 Market Cap simply the golden spot of indexes that in many ways seems to have exposure to many of those factors?
Submitted April 08, 2019 at 02:20AM by gymaliz http://bit.ly/2OUOyEZ
