FACTOR ETFS ANALYSIS AND QAS RISK-PREMIA SOLUTIONS
Since factor-investing funds have now been around for a reasonable period of time and gathering multi-billion dollar AUM, we can now compare performance across various products.
There are several key observations from a range of factor-based ETFs (Momentum, Quality, Value, Size, Minimum Volatility and High Dividend Yield).
First, it is clear that all ETFs have been closely tracking the S&P 500 during the majority of periods with some occasional deviations.
Second, when measuring the cumulative 5Yr Return (ending on Apr 9, 2018) – we see that the “Momentum” ETF (MTUM) is the only fund that actually outperformed the S&P 500 for the period. All other funds have not delivered the expected “risk-premia” excess return.
The iShares Edge MSCI USA Momentum Factor ETF (MTUM) had a nice run during second half of 2017 when 6-12 month momentum leaders (stock selection criteria) advanced higher during a late phase of the bull market. MTUM return was +36% in 2017.
Investors are probably curious about potential “value-add” benefits of factor-based funds and their ability to generate alpha on a consistent basis.
At QAS, we believe in a cyclical formation of the momentum process. We are focused on positioning our clients as early as possible within a positive trend. Therefore, at the time when most traditional momentum strategies begin generating positions in 6-12 month performance leaders, betting on the idea that top performing stocks tend to go higher (promoted by academia), our clients have already been in these stocks for a period of time, and in some cases already took profits. Also, we believe that by adding a relative score confirmation (analysis of a stock performance against a benchmark), we provide a complete momentum analysis (both absolute & relative momentum).
The cyclical approach to the momentum makes our methodology more sensitive, flexible and what we call “information-rich” data vs. “naïve traditional” methods as we break it down into multiple phases: early advancing, strongly advancing, early peaking, etc.
QAS Quantitative Ratings Diagram
We work closely with fund managers that are involved with various sophisticated risk-premia concepts far beyond the equity universe (all asset classes, volatility, spreads, etc.) and beyond static long strategies (long/short). Unfortunately, in contrast with underlying academic research, many live risk-premia strategies not only struggle to generate alpha, but also struggle to generate any positive returns for extended periods of time.
We provide our QAS Momentum overlay/opinion on dozens of risk-premia strategies by analyzing position-level information with our quantitative ratings. In a sense, we actually “fix” risk-premia portfolios with momentum.
As an example, a traditional value-manager does a great job selecting stocks based on his value-driven criteria. Unfortunately, that is where his investment process ends. We provide an alternative opinion/momentum overlay on stock selection with further risk management analysis when stocks are added to a portfolio.
Adding advanced momentum analysis into a risk-premia investment process (any factor, any strategy) allows for more effective risk management as well as more informative OW/UW decisions. Our advanced momentum input provides an additional checking-point for positive trend recognition and therefore, directly impacting profitability of the strategy.
For more information about QAS Momentum Factor programs please visit: WWW.QAS-SERVICE.COM