Factors To Consider

USMV exhibits about half the volatility of the QUAL portfolio. Not surprisingly, USMV’s beta coefficient is lower. Lower beta, higher alpha. 

USMV’s information ratio is positive, a sign that the fund’s active bet—the systematic management of portfolio volatility—paid off. That USMV’s ratio is relatively low is evidence of greater variance in the fund’s day-to-day tracking error versus VTI.

Factor ETF Year-to-Date Performance (January - October 2019)

factor-performance.png

So, what about the contention that beta’s been a bad bet this year? The table’s best performers bet with beta: QUAL in full-throated fashion and USMV to a more limited degree. The argument against beta is better made by an ETF that’s managed to produce a negative coefficient. The AGFiQ US Market Neutral Anti-Beta Fund (NYSE Arca: BTAL), with a beta of -0.88, earned a return of just 6.60 percent for the year, less than 30 percent of the broad market’s gain.

All this is history. What of the future? Are the current table-toppers likely to produce paybacks for their active bets going forward?  In a word, yes. Fundamentally, the wind is at QUAL’s back. Investors turn to companies exhibiting financial strength in the late stages of a business upcycle and during subsequent contractions. Our economic recovery is no spring chicken. One can reasonably argue that we’re, in fact, peaking.

This is also a favorable environment for USMV. Volatility spikes have been market features for nearly two years, raising the background radiation level for that infamous measure of fear, the Cboe Volatility Index (VIX). The 50-day moving average for VIX was 10.41 at the start of 2018. It’s now more than 40 percent higher. High volatility is historically associated with significant market tops and follow-on declines.

VIX 50-Day Moving Average Uptrending

vix-average.png

Over the longer term, the technical picture for USMV and QUAL—especially for USMV—is better than that of any factor fund in the table.

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Disclosure: None.

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