How’s that factor strategy been working for ’ya lately? That’s a topical question for a growing number of investors as “smart beta” products play a bigger role in portfolio design. You may not be drinking the factor Kool-Aid, but it’s still worthwhile to check in on these risk premia periodically for some context on what’s driving equity performance generally. With that in mind, let’s review a set of eight ETFs that represent the usual suspects in the US equity factor space.
In theory, there’s a strong case for building portfolios based on risk factors. In practice, the jury’s out.
Why are investors rushing back into safe-haven Treasuries? Maybe the crowd’s recognizing that political risk for the US is higher than previously assumed. Or perhaps the softer estimates for first-quarter GDP growth are weighing on sentiment. A highly valued stock market doesn’t help. Whatever the reason, Treasuries are everyone’s new best friend… again.
Recession risk remains low for the US, but there are hints that the sluggish pace of growth in last year’s fourth quarter may continue in Q1.
Can you say whipsaw?
All the major asset classes rose last week, according to a set of exchange-traded products representing the key components of the global markets. The bounce follows the previous week’s slide that delivered red ink far and wide. Volatility may be low when measured over longer stretches of time for most markets, but the last two weeks have been a roller coaster ride.
● Investment Traps Exposed: Navigating Investor Mistakes and Behavioral Biases
By H. Kent Baker and Vesa Puttonen
Summary via Amazon
Investment Traps Exposed helps investors and investment practitioners increase their awareness about the external and internal traps that they or their clients can encounter. Baker and Puttonen not only examine common investing mistakes, behavioral biases, and investment traps that can ensnare investors, affect sound judgment, and reduce wealth but also delve into how to recognize and avoid these errors. The authors present objective advice, case studies, and empirical evidence in a user-friendly manner and also nudge investors to stay on the right course to mitigate misbehaving.
Contrarian Factor Timing is Deceptively Difficult
Clifford S. Asness (AQR Capital Management), et al.
March 7, 2017
The increasing popularity of factor investing has led to valuation concerns among some contrarian-minded investors, and fears of imminent mean-reversion and underperformance. In this paper, the authors find that despite their recent popularity the most common factors or styles, namely the value, momentum and defensive styles, are not, in general, markedly over-valued as measured by their value spreads. Continue reading
The Federal Reserve raised interest rates yesterday as the Treasury market reacted by lowering yields. The softer market yields could be a vote of confidence in the Fed’s monetary policy in the sense that inflation worries are contained. An alternative view is that the bond market is becoming anxious at the sight of tighter monetary policy amid falling estimates for first-quarter GDP growth in the US.
Bob Shiller is concerned about the rise of “everything is different” chatter. Seeing parallels in the dot-com bust in 2000-2002 with current conditions, the Yale Professor tells Bloomberg that the equity market looks frothy, based on his calculation of the cyclically-adjusted price-earnings ratio (CAPE).