No ‘Easy Button’ With Multifactor ETFs

April 11, 2019

Sam Huszczo

Sam Huszczo is founder and head of SGH Wealth Management, a young Detroit-area advisory firm with about $150 million in assets under management. As an RIA with a CFP designation and a CFA under his belt, Huszczo is a fan of statistics, a strong believer in factor investing, an avid user of ETFs and a proponent of low-cost investing. He shares with us how he’s managing money today.

 

ETF.com: Why did you become an advisor?

Sam Huszczo: I started in the industry at a commission brokerage firm almost 15 years ago. Not too long into it, I realized it wasn't a great fit for me. I didn't enjoy the relationships with clients in that model, so I decided to start my own firm. I started pounding the pavement and getting clients brick by brick.

Maybe five years ago, with about $85 million in assets at that time, I realized I wasn't able to handle all the work myself, so we grew to a firm model with multiple advisors and a team-based approach.

ETF.com: What’s your investment philosophy?

Huszczo: Our No. 1 tenet is to get our costs down as low as possible. We've continually done that over the years, but in the past, we were in some mutual funds, and now I’d estimate we have about 91% of our assets in ETFs. It’s about the low-cost availability.

I’d also say if ETFs didn’t exist, our alternative wouldn't necessarily be mutual funds, but an individual stock model. I just don't believe that it fits our target market, which is individuals—people in their 50s who are just approaching retirement—with between $500,000 and $3 million in assets.

ETF.com: For that demographic, risk management is crucial, right? They can’t necessarily afford to make up for sharp losses. How are you investing for them?

Huszczo: We utilize a core engine of just an index, with the strong belief in statistics—over long-term periods of time, the stock market is positive. We want to take advantage of that, because a percentage of a client's assets won't be used for 15-20 years, even at retirement. So, we bucket that in maybe a fund like the Vanguard S&P 500 ETF (VOO), or something super cheap at the core.

Then, we add elements in addition to that, more suited to current market trends. One factor we've leaned on heavily is low volatility.

ETF.com: You’re a factor investor. What’s your process to implement factors into portfolios?

Huszczo: Yes, that's our main tool outside of the core. Our decision-making process comes from our larger market analysis. We pay attention to metrics that tell us whether the markets are overvalued or undervalued, and we look at each sector to try to figure out if there's any overvaluation, bubbles that we could avoid.

We don’t employ a multifactor approach. The purpose of even introducing one factor is to try to be different than the S&P 500.

I believe that if you add too many factors together, it's just going to overdiversify again, and get you back closer to the S&P 500 at a much more expensive cost. If I owned four factor-based ETFs, those might be charging 0.15% to 0.25%, whereas if I just bought the S&P 500 index with Vanguard, it's 0.03%. I would argue that, a lot of times, when you combine too many factors together and look at all the holdings, you're getting pretty close to that S&P 500.

ETF.com: Multifactor ETFs have surged in adoption. Some see as them as the “easy button” for factor investing.

Huszczo: Exactly. And there's no easy button in investment. Multifactor has a great story. But I think they can fall prey to data mining; they'll take a very specific time frame where it has done phenomenal and maybe ignore the rolling periods where it hasn't done as well.

But more importantly, again to your point, a lot of people think of it as the easy button, and that's a little dangerous.

ETF.com: In 2019, where are you seeing opportunities in the U.S. market?

Huszczo: It's fairly common nowadays, but we too feel cautiously optimistic. One thing last December reminded us of is that emotions are still at an all-time high in investing.

To talk behavioral finance, our emotions are almost always dead wrong when it comes to investing. When things feel good, that's usually when you should be derisking, and when things feel awful, that's when you probably should be adding more risk.

Right now, we don't believe the markets are overvalued. But we also don't think there's any undervaluation to really speak of. Things are valued where they should be.

We've had now five-consecutive quarters of double-digit earnings growth in the S&P, but I’d argue that earnings growth has been mostly a result of corporate tax rate cuts, and we can’t say for sure those tax rates won’t be called into question at some point given the current political environment.

Our concern is, what if something pops up over the next two years—a global economic slowdown, or tax reform coming into question? We want to be prepared for that moment. We don’t want to simply go down less than what the markets go down by; we want to minimize losses, but seize that moment and be buyers at lower prices.

ETF.com: Buy the dip? With ETFs?

Huszczo: Yes. What’s cool is that ETFs allow you to buy the dip where it's not pure market timing. We're in the stock market at all times. We're not ever a firm that would get into cash. That's not going to help anybody out. What we can do is tilt ETF investments to one area or the other to have higher probability to capture better returns.

ETF.com: Any specific ETFs you like right now?

Huszczo: We're fund-brand-agnostic. One of the great things about ETFs is you can really compare one to the other fairly easily.

What I also like about the current state of things is everybody's competing on cost. We utilize Vanguard ETFs a lot because they're usually the cheapest. But they haven't really gotten into low-volatility factor ETFs yet. We don't believe they're a great option for that singular space. So we look elsewhere. We utilize Invesco, iShares and others.

But next year, if three more firms open up new low-vol ETFs, and they're cheaper and based off of the same index and the same methodology we like, we have no qualms moving over to try to save our clients another 0.05% or so. That's the constant search.

Contact Cinthia Murphy at [email protected]

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