We have substantially reduced our exposure to market cap weighted ETFs. In the past, our core ETF holdings were market cap weighted and that worked well. To be clear, in the past we were balancing out our factor exposures via specific bets to the momentum, value, and size factor. However, our exposure to the beta factor had trumped others.
Being long beta was the 'winning trade' during the QE induced liquidity rally from 2010-2016. Why? Central Banks purchased $15 trillion of stocks and bonds over this time-period. Being long beta was all that was needed. However, in the years to come we believe beta as a standalone factor won’t perform nearly as well given:
1) liquidity will be declining due to QT, Fed rate hikes, and other CBs tempering their balance sheets
2) the US economy is coming near the end of the cycle.
A few other things to point out:
· Market Cap (or beta) has gotten expensive relative to other factors. Why? Have you seen ETF fund flows of late? Investors have gobbled up hundreds of billions of market cap weighted ETFs in the past few years.
· Given where we are in the cycle, we prefer diversifying our factor exposures as much as possible. There is no shortage of academic research that shows, diversifying across factors in a portfolio can provide higher risk adjusted returns.
· Certain (but not all) multi-factor strategies outperformed their market cap weighted benchmarks during the February sell-off. Given our overarching view of the global economy (constructive but entering the end of the US cycle), we think this rebalance accomplishes our goal of producing attractive risk adjusted returns across varying economic cycles. The key phrase in the previous statement was varying.
We have published our ETF holdings on our website and we will be producing more research on specific ETFs we are utilizing in the Factor space. In the meantime, if you are interested in viewing our ETF portfolios, we welcome you register on our website and we will grant you access (free of charge). https://www.astoriaadvisors.com/members
Best, John Davi
Founder & CIO of Astoria
For full disclosure, please refer to our website: https://www.astoriaadvisors.com/disclaimer