Factor Investing’s Roller Coaster Ride

February 18, 2016

Factor Diversification Works

Here’s the good news: diversification still works. An equal-weight portfolio of all five factor tilts, rebalanced annually, would have generated an annualized premium of 2.34% a year with a maximum relative drawdown of only -16.05% (though the drawdown length was still seven years; the late 1990s were a “funny” time).

For investors looking to build a diversified portfolio, all the component pieces are available—value: the Guggenheim S&P 500 Pure Value (RPV | A-63); size: the Guggenheim S&P 500 Equal Weight (RSP | A-78); momentum: the iShares MSCI USA Momentum Factor (MTUM | A-71); dividend growth: the ProShares S&P 500 Dividend Aristocrats (NOBL | A-71); minimum volatility: the iShares MSCI USA Minimum Volatility (USMV | A-76); and even quality: the iShares MSCI USA Quality Factor (QUAL | A-84). For those looking to buy a more turnkey solution, there is the new multifactor fund, the Global X Scientific Beta US (SCIU).

The important takeaway here is that while factor investing can help an investor outperform over the long run, an individual factor can underperform significantly for a prolonged period of time, testing the mettle of any investor.

However, to reap their benefits, we have to consider these exposures as long-term allocations, not trades we expect to benefit from in the short run.


At the time of writing, Newfound Research held positions in RPV, RPS, USMV, MTUM and NOBL. Newfound Research LLC is a Boston-based quantitative asset management firm focused on rules-based, outcome-oriented investment strategies. Newfound specializes in tactical asset allocation and risk management solutions. Founded in August 2008, Newfound offers a full suite of tactical ETF managed portfolios covering global equity, U.S. small-cap equity, multi-asset income, fixed-income and liquid alternative asset classes. For more information about Newfound Research LLC, call us at 617-531-9773, visit us at www.thinknewfound.com or email us at [email protected]. For a list of relevant disclosures, click here.

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