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What's going on with MFEM (PIMCO RAFI Dynamic Multi-Factor Emerging Markets ETF)?
What's going on with MFEM (PIMCO RAFI Dynamic Multi-Factor Emerging Markets ETF)?
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If market cap an over-valuation disappoint you, I recommend you consider RAFI Fundamentals indexes instead. They weigh companies based on cash flow, company health, sales, real metrics. The international ones perform really well with nice dividends too. FNDX = US , FNDF = International developed , FNDE = International emerging
I suspect younger investors are overconfident because they’ve had it good for so long. The 2008 economic drawdown was 18 years ago, it probably feels like the stuff of legend and not reality. I admit it’s euphoric when big tech runs hot, but when it doesn’t it’s gonna be painful if practically half your portfolio is Nvidia. S&P500 is a good addition to any portfolio, but it should not be the only investment nor double-down with growth funds like VUG. Diversify folks, you’ll thank yourself later. Final thoughts: Anybody ever take a look at RAFI Fundamental Index? It’s disturbing how Nvidia is number 50 in terms of money flow and other health factors, but it’s number 1 on market cap expected valuation.
Can weigth by RAFI fundementals, see PRF (large caps) or FNDB (large/mid/small). TSLA/PLTR end up being weighted to nothing cause they suck. APPL/GOOG/META are still at top cause they're solid companies, though not nearly as high as in VOO. I mean no way tech sector undergoes a major correction without entire market going along with it, heh. Highly likely VTI beats out whatever fancy stuff you try.
Take a look at some of the "RAFI" type funds - just a different way to define the parameters on an "index" Funds like VLU, FNDB, FNDF have more of a value aspect - might be a good place to invest if your worried about how rich the S&P500 is. I have $ in all 3 of those and sleep well at night.
I just perused the FTSE RAFI indices (all world, developed, ex-us, et. al.). Impressive returns tbh. Many of them outperforming US indices even with the AI boom propping US markets. Thanks for the mention…I might park some money in these given the US political climate.
Another option are funds that track a more value oriented index like the FTSE RAFI Developed 1000. This makes a weighting judgement on the basis of cash flow, sales etc, but is a developed world all cap index. Performance is similar to other global diversified funds but it's less volatile. Costs 0.25%
it's pretty well established indexing is creating distortions in the market. https://pages.stern.nyu.edu/~jwurgler/papers/indexing13.pdf https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5259427 the biggest flaw of most index funds is they don't account for valuation, and valuation is the best predictor of long-term ROI. you can mitigate this risk by somehow paying attention to valuation (at least for part of the portfolio) such as with the RAFI and fundamental indexes, value indexes generally, or using traditional indexes that are more reasonably valued (such as dropping US stocks a bit and boosting international stocks a bit).
>Research Affiliates generate a number of indexes (RAFI) used for ETFs and mutual funds that tend to be light on tech/value tilted. Yup, PRF for US and PXF for ex-US very good performance
XMAG is the S&P 500 minus the magnificent 7. Research Affiliates generate a number of indexes (RAFI) used for ETFs and mutual funds that tend to be light on tech/value tilted. The S&P 500 is divided into 11 sectors, and there are individual sector funds available. Consumer Staples, for example, is pretty far from tech. I am sure that others will chime in additional, and probably better, ideas.
It's an adverse selection problem. Better to construct your own broad smallcap fund, and hold no matter the market cap. Or for a lazier approach, use an ETF designed to overcome index limitations. Such as RAFI, or Buyback, or funds managing adverse selection. Still passive, still rule following, still low cost.
TLDR: index via s&p500 is momentum investing. Dear Op, try the [RAFI etf instead, it is fundamental weighted.](https://www.morningstar.com/funds/how-do-fundamentally-weighted-etfs-implement-contrarian-bets)
I would keep some exposure, but US CAPE is still high. There's a long way down. Fundamental indices could hold up e.g. RAFI US. Also consumer defensive & healthcare ETFs. I shifted into gold and euro bonds early this year.
If you want to do value investing, why not just buy into a value index fund like the UBS FTSE RAFI developed 1000 as an example? If you read books like Intelligent Investor or Smarter Investing then the evidence is very clear that there's no point trying to time or pick out individual stocks
In finance, value specifically refers to low price to book, from the nomenclature used in the 5-factor capital asset pricing model by fama and french. This does not account for "intangibles" like brand moat or IP and CEO rizz and such. These factors are accounted for in some strategies, the RAFI index being one. AVUV screens for value (low p/b), profitability (measures like price per cash flow, price per sales growth, gross profitability), reinvestment (it excludes companies that reinvest in assets aggressively, since those are almost always shitty small cap growth companies), and small/micro cap companies. The combination of value and profitability is the most robust 2-factor effect we have, and small caps acts as an amplifier to the risk and expected discount rate on future cashflows.
Bro, you gotta dump IMCG. XMHQ is already basically a midcap growth fund. Being a "quality" is such a marketing term. Every "quality" factor is different for each fund manager. Typically, the core underpinning is some application of a profitability screen and a treatment of "intangibles", such as how the RAFI index would account for them (brand moats, IP, regulatory environment, ceo gravitas, etc). Average p/b is still really high on XMHQ like it is on IMCG (better to have a lower p/b if youre targeting higher stock returns), but IMCG is just a shitty idea no matter what considering the opportunity cost. If you buy into this quality factors concoction, keep it, tilting to gross profitability should improve portfolio returns under the CAPM, but just a growth fund like IMCG sugg bowls.
Ok so which index? ACWI? CRSP Total US? Russell 3000? Russell 1000? S&P 500? S&P 500 growth? Value? Nasdaq 100? MVIS US Listed Semiconductor index? Motley fool 100 index? RAFI Fundamental Large Cap? MSCI Quality? Should he do the US or the international version? What about the Janus Henderson Small Cap Alpha Index? Your underlying point (that security selection is difficult, and to the extent that the average investor can minimize relying on their own skill there the better off they likely are) is a fair one, but let’s not pretend that saying “just buy an index fund” somehow removes the active decision making from the investment process.
The FTSE RAFI and Russell 1000 are fundamentally different in their approach and should be used for different purposes which makes it difficult to compare them. What is better, an apple or a hard boiled egg? For what it’s worth, the FTSE RAFI tracks VERY well against the US large cap index, similarly to many other factor based indexes or funds. The Russell 1000 is basically the SP500 plus the next 500 companies by market cap. Like the SP500 and total market indexes it’s going to ride the line between large cap blend and large cap growth. Factor based investing is a legitimate strategy and can add a lot of value in the right type of portfolio.
From what I understand you’re proposing some kind of contrarian investing between asset classes, but you could do that within those asset classes in order to not reduce your expected returns by having more bonds than you’d like to.. You could invest in value or international stocks, for example. I myself try not to time the market, but I believe in having some tilts towards securities with greater expected returns. I invest in small cap value as a a way of trying to protect my self a little against possible overvaluations in the total market. There are also some funds that over or under weight stocks according to their over or under valuation. AVUS, DFAC or funds that track RAFI fundamental indexes are good examples.
you'd probably be interested in the RAFI fundamental weighted index.
The way I see it is that a fundamental index like RAFI will most likely enjoy a near term correction as opposed to a cap weighted port I do think cuts have been over estimated. PMI was hot, jobs was hot, GDP was hot. I do think the FED (as per history and recent remarks), will always teeter on over-correction provided they can be assured the inflation beast is 100% terminated. Overweighting some more fundamentally strong under performing stocks could be a good move?
>How does that work where companies are weighted ('relative size') by these fundamental features, and then weighted by market cap? RAFI is not weighted by market cap at all. they weight by four elements: >Research Affiliates' fundamental indexes (known as RAFIs) rank stocks based on book value as well as trailing five-year average cash flow, sales and dividends >Is this typical of market cap weighted indices? >And is it correct to think a 'traditional' market cap weighted index is based purely on a company's trading price (or market cap)? yes, and this is the major possible flaw of market cap index funds. you buy more and more of a particular stock simply because the price of the stock goes up and not because the company is earning a profit or selling more goods or whatever.
First off RAFI is atypical. So understand your specific question and your general phrasing are in conflict. RAFI's main indexes are fundamentally weighted. Here is a summary page from RAFI that might clarify: https://www.rafi.com/content/dam/rafi/images/index-series/rafi-strategies-investment-process-racwi-4423.png * In terms of security weightings within countries they are using "float adjusted market capitalization weight" which is pretty normal. SP500 for example uses this methodology with some very slight deviations on stock splits... * In more detail the universe of stocks is somewhat more variable than normal. They are using ratios more consistent with CRSP definitions than SP, or arguably what SP used to do around WW2, but again this is an implementation detail. * Weighting between countries after security selection is fundamental. I.E. if USA stocks are rising relative to European stocks you'll be selling the USA and buying Europe. * They reweight monthly not every 6 months or annually. This is IMHO is slightly better but we'll have to see how it turns out in practice. > Is this typical of market cap weighted indices? No this methodology AFAIK is fairly unique to RAFI. OTOH other companies do have contrarian indexing. > And is it correct to think a 'traditional' market cap weighted index is based purely on a company's trading price (or market cap)? See my note about float adjusted. For large cap stocks that's generally close enough for small cap or markets with lots of control investors, no that is a bit off. > Can someone explain the differences between this cap weighting approach and this fundamental index construction? I may be misunderstanding but both seem 'fundamental' from my understanding? RAFI fundamental indexes weight companies based on fundamentals. For example Schwab's FNDF (Fundamental weighted International for USA investors based on RAFI index) would sell companies within the market not the whole market. So if a particular German pharmaceutical company rises you sell and buy everything else. while in the global index it is the entire market that matters. You are holding X amount of EU (down to certain market cap) not trying to weight individual companies.
>RAFI I confirmed your assessment. PRF loses to SPY by 8% over a five year period.
There are different factor theories, one major one is based off the Russell 1000 which is the RAFI US 1000. It’s a value- theory one which holds the Russell components but weights them by different metrics (sales, cash flow, operating income, and dividends.) Its not exactly a S&P ex _______ metric, but these are the sorts of products which do exist. There are plenty of index funds which just weight the constituents differently and weighting based on fundamentals is a big one. I don’t know at all if that’s right for you, but reading about these sorts of funds could help your search. That’s PRF. I also know WisdomTree has all sorts of fundamental weighting strategies and literature on those. Just the first company that came to mind, there are plenty of others. Jeremy Siegel, the professor who wrote “Stocks For the Long Run” is there so, you’ll probably see more value weighting concepts as opposed to matching the weighting + exclusions, still Im not trying to suggest any investment, just that reading about these sorts of strategies for portfolio construction might help guide your search. If someone has sufficient funds, however, there are long/short strategies which would accomplish this where an investor buys index funds and shorts the stocks that the investor wants to exclude.
Voya Emerging Market Fund (IHD) — also pays 17% dividends ProShares UltraShort FTSE Europe (EPV) — free float-adjusted market cap weighted index representing the performance of large, mid- and small cap companies in Developed European markets, including the UK. Invesco FTSE RAFI US 1000 (PRF) — is composed of approximately 1,000 common stocks and is designed to track the performance of the largest U.S. companies based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. AQR Large Cap Momentum Style Fund (AMOMX) — The fund pursues a momentum investment style by investing primarily in equity or equity-related securities (including, but not limited to, exchange- traded funds, equity index futures and real estate investment trusts) of large-cap companies traded on a principal U.S. exchange or over-the-counter market that the Adviser determines to have positive momentum.
Maybe look into ETF's that track a Research Affiliates Fundamental Index (RAFI). These indices weight companies based on fundamental measures rather than market cap. More info here https://www.researchaffiliates.com/strategies/rafi and here https://www.rafi.com/index-strategies/rafi-fundamental-indices. RA has been publishing on this idea for several years and it looks like FTSE has bought in or partnered with RA on the idea. I briefly googled and it looked like there's a Schwab and an Invesco ETF.
Cash is paying ca. minus 7-8% right now. The interest rates are rising in many countries. We are likely to be heading for a recession (In UK, USA & Europe). Stocks will be the best long term place to be. (> 5 years), but we could be in for more volatility over the next year or two. Trading platform comparison [https://monevator.com/compare-uk-cheapest-online-brokers/](https://monevator.com/compare-uk-cheapest-online-brokers/) Consider one or two of these world ETFs as a good place to start. (There are others). HSBC MSCI World UCITS ETF https://markets.ft.com/data/etfs/tearsheet/summary?s=HMWO:LSE:GBX Invesco FTSE RAFI All World 3000 UCITS ETF https://markets.ft.com/data/etfs/tearsheet/holdings?s=PSRW:LSE:GBX Xtrackers MSCI World Minimum Volatility UCITS ETF 1C https://markets.ft.com/data/etfs/tearsheet/summary?s=XDEB:LSE:GBX Xtrackers MSCI World Value UCITS ETF 1C https://markets.ft.com/data/etfs/tearsheet/holdings?s=XDEV:LSE:GBX
Has there ever been a review of [RAFI](https://www.researchaffiliates.com/strategies/rafi/rafi-fundamental-index)-based indexing versus other factor tilts?
They weren’t around 3 years ago when I started the portfolio and I didn’t want to drastically increase the number of ETFs I use when the RAFI and multi factor funds that I started with are just fine. VFMF was an exception because of how phenomenal it is so I did grow my line up for that.
RAFI Fundamental Indexing is exactly this. Research Affiliates is the firm that runs it and the brains behind it Rob Arnott frequently does the podcast loop it is super fascinating to hear about the development and implementation of this style of "smart-beta" or "sorta-factor investing" whatever you want to call it. It's something that is really only available to higher net worth investors though.
Thanks for the informative posts! But haven't the low-cost market cap "boomer ETFs" been basically outperforming any of the fancy "smart beta" funds? I remember reading about RAFI's fundamental indexing and being impressed, but it appears that as the famous Yogi Berra quote goes "In theory there is no difference between theory and practice. In practice there is". I remember looking at the past performance, and it appears that due to the inherent value tilt, it got a larger drawdown when the market crash, and even though it *did* outperform the market in the recovery, it couldn't overcome the magnitude of the draw down. That's where I gave up on all of these fancy indexes. I tried to see what I could with PV using VTI/VEA/VWO but I only managed to get to 85.15% CAGR in your period (using 1.58% margin rate). I wonder if this can be achieved using a much smaller amount of ETFs because 11 seems way too much to manage. Plus, how do you even decide on the % allocations between them?
Some funds certainly can be worth a higher fee. For example, SWTSX returned 21% YTD as of the end of November, whereas the US small cap value fund AVUV returned 37%. The bottom line for an investor is performance after fees and taxes, and if I could pick funds with 2% fees that would perform even better, I would. But the [evidence](https://github.com/investindex/Index#f1) indicates that picking high-fee, active funds is not a wise long-term approach. The portfolio of three Schwab mutual funds is a fine portfolio and much more diversified than SWTSX alone. But as I explain [later](https://github.com/investindex/Fund/blob/main/README.md#beyond-mainstream-factor-funds) in that section, I don’t think it’s ideal. I love Schwab as a broker, but I don't think it would be a good idea to limit yourself to Schwab funds. [Lower down](https://github.com/investindex/Fund/blob/main/README.md#example-portfolio), I give an example of a simple portfolio with better implementation: VT + AVUV + AVDV. If you wanted to keep SWTSX, you could replace it with SWTSX + VXUS + AVUV + AVDV. If you do use the three-fund Schwab portfolio, you should make sure you understand the difference between a typical value fund and a RAFI fund like SFSNX. The three-fund portfolio also doesn’t include emerging markets because SWISX is a developed ex-US fund, not total international. Emerging markets have a low correlation with developed markets so they're an important part of diversification. Happy to hear you found it helpful, please feel free to follow up if you have any further questions. I did see your message but figured I'd just reply here.