Factor Rotation Is Possible, But Is It Worth It?

December 30, 2016


We believe there is conclusive evidence that factor rotation can be an effective means of improving upon passive buy-and-hold multifactor portfolios.

Between factor switching and multifactor rotation, we believe that rotation shows more promise. In our hypothetical example, rotation generated an excess return of 1.32% per year compared to the benchmark multifactor portfolio.

That said, in the real world, the marginal performance benefit may be quickly eroded after management fees, transaction costs and taxes are considered.

Above all, we believe investors should consider whether the potential benefits of factor rotation justify the potential anxiety of multiyear drawdowns against a passive buy-and-hold portfolio. After all, the optimal investment portfolio is, first and foremost, the one we can stick with.

Newfound Research LLC does not hold any of the ETFs referenced. The company 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. 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, 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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