Analyzing Your Factor Bets

August 19, 2019

It’s pretty rare I take the time to write about something that’s inside the four walls of, but this is one of those times.

As of a few days ago, we feature a new readout on our equity ETF fund report pages here at the MSCI FaCS Factor Box. And I genuinely think it’s solving a very real-world problem for investors.

At this point, you’re probably exhausted from a decade of talking about factors and smart beta. And that’s understandable. Smart beta funds have often been marketed as some kind of wild black box that will solve all your investing problems. And of course, we know that’s not true.

Importance Of Factor Exposure

But what gets lost in that hyperbole is that factor exposure—the core of almost every smart beta product—is in fact incredibly important. Depending on which bedside insomnia-beater paper I grab, estimates from academics suggest that as much as 80% of manager performance in the active space is actually explained simply by looking at factor tilts.

But what does that mean for you? Well, anytime you’re buying an equity ETF, one of the due diligence questions you should spend a significant number of brain cycles on is “what bets am I making?”

After all, if you’re just looking for large cap U.S. equity exposure, a fund that, say, holds mostly midcaps, is making a huge bet. Asking that question in factor terms is even more important. And finally (finally!), is able to help provide some of those answers.

What The Heck Is FaCS?

There are lots of firms out there that do factor research on stocks and funds. When I fire up my Bloomberg terminal, I can go to a portfolio and pick and choose from dozens of risk models that I can then apply to any given basket of stocks (like an ETF portfolio), and they’ll spit out reams of difficult-to-interpret data.

Don’t get me wrong, if this were all I did all day, and I were better at math, that data would be awesome: a wealth of riches. And if I’m a major institution, the chances are I have software on my desk from Barra, Axioma or any number of smarty-pants firms that can help me tease out countless nuances.

But I’m a normal person (most of the time). I kinda just want a framework that lets me compare things. So when I was first exposed to the MSCI FaCS system, I was, more than anything, relieved. Actually, it’s pretty simple.

Start With A Benchmark

First, let’s just start with a benchmark. In this case, the naive benchmark for all comparisons is the MSCI All Country World Index Investable Market Index. This is a pretty good proxy for “everything”; it’s almost 9,000 stocks in developed and emerging markets, and is 99% of the world’s market cap. That’s “the market.”

The relevant question for investors the—for any fund—is: What bets does XYZ make versus that broad market? Or to put it in factor terms, how “valuey” is this particular fund compared to, well, everything. FaCS just answers that question. For instance, here’s how FaCS looks for the good old S&P 500 (proxied by the SPDR S&P 500 ETF Trust (SPY)):


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