We’ve posted our quarterly attribution materials on our performance site.(1) We enjoyed putting the materials together and think they will be informative for those who follow our Indexes. The materials and videos are part of our long-term plan is to continually improve our quarterly communications

The purpose of this study was to examine the changes in the distribution of the US equity risk premium as the return horizon varies from monthly, annually, 3 year, 5 year, 10 year, 20 and 30 year periods. The equity premium was calculated as the monthly difference between the Market and Treasury

Unless you are a die-hard buy-and-hold investor, chances are that you need to rebalance your portfolio at some point. The question is when? And how often? And why at a specific time? Some strategies rebalance once a year, some multiple times a day. What if there were better times to rebalance? Last

What are the Research Questions? Can investors identify skilled and unskilled mutual fund managers by observing their tendency to herd? Do differences in herding behavior across funds predict mutual fund performance? Does skill drives the link between herding and future performance? Does herding

As the year turns, a common practice is to assess a portfolio and see how each position performed. The summary for stocks is easy: equities did not do well. Whether you were invested in U.S. stocks (down ~5%+), developed markets (down ~13%+), or emerging markets (down ~20%+), being invested in

Each time S&P Dow Jones Indices publishes its latest Active Versus Passive Scorecard, the persistent failure of the vast majority of actively managed funds to outperform is highlighted. The evidence on this failure led Charles Ellis to call active management the loser’s game — while it’s

In the last post in our machine learning series, we showed how nonlinear regression algos might improve regression forecasting relative to plain vanilla linear regression (i.e., when underlying reality is nonlinear with complex interactions). In this piece, we’ll first review machine learning for

What are the Research Questions? This editorial introduces data science to the wider investment community and highlights some of the advantages (and potential pitfalls as discussed yesterday) it can bring to everyday investment practice. The paper answers two apparently simple questions: What is

What are the Research Questions? Data mining in finance has long been a concern for academic researchers. Campbell Harvey, one of the authors on this paper, is leading the effort to ensure the integrity of empirical finance research. For example, see here for a post on his address to the AFA. The

This week Ryan and I discuss two posts. First, we examine a guest post by Matthew Bartolini of State Street Global Advisors, discussing the underperformance of Value and its outlook for 2019. Second, we examine a guest post by Elisabetta on a recent JPM paper examining the effects that ETFs have had

Borne in academia and raised by fund managers seeking to outperform, value style mutual funds and ETFs today hold close to $2 trillion(1). But with poor returns over the past decade, the question of whether “value is dead” has become a popular topic of conversation.(2) The search term “is

What are the Research Questions? The paper investigates the following research question: Have ETFs flows affected the correlation structure of returns? Have ETFs flows affected the liquidity of underlying securities? Have ETFs flows affected the ability of managers to generate alpha? What are the

Trend following is well-known and the simplest version is as follows: you buy an asset when it has positive momentum (the price goes up) and you sell it and go to cash (or any other safe haven) when the momentum turns negative.(1) The best-known example of trend following is on the monthly ETF SPY

You can watch the video via the link below: This week Ryan and I discuss three posts. First, we examine a guest post titled, “Trend Following on Steroids,” which examines ways to enhance a simple trend-following strategy. Second, we examine a post I wrote regarding how to use trend-following

A question we have been receiving recently is the following: How should I use trend following within a portfolio? Generally, the questions are related to our Global Value, Momentum, and Trend Index, which allocates to the (1) Value, (2) Momentum, and (3) Trend factors. A big difference between the

What are the research questions? USES: Can investors really separate “alpha” from “beta”? What are the ins-and-outs of understanding the exposures in a portfolio and their contribution to “alpha”? ABUSES: Are there differences in the way strategies are constructed in academic articles

What are the Research Questions? The authors propose an estimation of the capital stock that involves all identifiable and measurable financial and nonfinancial assets in the world economy. This portfolio seeks to represent the so-called “Global Market Portfolio,” that all MBA students learn to

Who are the buyers and sellers of volatility-contingent strategies? How extensive is volatility trading and put selling currently? Could a volatility “cascade” cause a crash across correlated asset classes? Are there mechanisms that might provide stabilization? What are the Academic Insights?

This week Ryan and I discuss three topics. First, we examine the returns to U.S. stock broken down by (1) size and (2) factors (mega-cap stocks were the place to invest over the last 5 years!). Second, we examine a post by Adam Tkaczuk on Opportunity Zones–a must read for those with low basis

The “stock market,” at least as measured via the S&P 500, has been on an epic performance run — especially relative to almost all asset classes. It doesn’t matter whether you look at the other asset classes by geography (e.g., US, developed, emerging), style (e.g., value, momentum), or

What are the research questions? Do hedge funds exploit stock mispricing? Specifically, do hedge funds tend to hold undervalued stocks that exhibit positive alphas? Do hedge funds profit from these holdings in undervalued stocks? Does the trading in these stock reduce mispricing? What are the

The article addresses the estimation of capacity for an equity fund that forms portfolios based on a given investment strategy. It fits within three strands of literature: i) theoretical models of optimal trading or portfolio construction under alpha erosion and trade frictions; ii) empirical

This week Ryan and I discuss two topics. First, we discuss a paper examining the performance of bank affiliated mutual funds. Second, we examine a post by Larry Swedroe on diversification. Paper Links: Do Bank Affiliated Funds Underperform Affiliated Funds? Asset Diversification in a Flat World.

Diversification is a fundamental principle of prudent investing due to its ability to mitigate/minimize risks. In fact, it has been called the only free lunch in investing because, done properly, it can reduce risk without reducing expected returns. This led to the conclusion that investors should

You can watch the video via the link below: This week Ryan and Jack discuss several important topics. First, they discuss the tracking error associated with trend-following strategies. Second, they chat about a paper by researchers from Goldman Sachs, “Constructing Long-Only Multifactor

A question I’ve received in the past is the following: If you could go back in time five years ago and tell yourself something about investing, what would it be? My response is the following: Tracking error. First, what is tracking error?(1) Tracking error is a measure of how much a strategy

The heightened interest in factor investing has been accompanied by a corresponding focus on the nuts and bolts of constructing multifactor portfolios. There are essentially two ways to go: In a one-step process, single factor signals are blended into a composite signal and one multifactor portfolio

This week Ryan and I have a discussion on three topics. First, we discuss ETF tax efficiency based on the findings in a new paper by the RAFI team. Second, we discuss the profitability factor as Larry Swedroe highlights a new paper on international evidence. Third, we discuss my article on how one

Robert Novy-Marx’s 2013 paper “The Other Side of Value: The Gross Profitability Premium” not only provided investors with new insights into the cross-section of stock returns, but also helped further explain some of Warren Buffett’s superior performance. (Wes Gray summarized that paper

“What is the correct benchmark for trend following?” This is a difficult question, and there really is no perfect answer. As many of our readers know, we are fans of trend following and trend-followed portfolios. For those unfamiliar with trend following, the idea is rather simple–invest in an

The CAPM was the first formal asset-pricing model. Market beta was its sole factor. With the 1992 publication of their paper, “The Cross-Section of Expected Stock Returns,” Eugene Fama and Kenneth French introduced a new-and-improved three-factor model, adding size and value to market beta as

Factors, or “style” investing, seems to be all the rage these days, including the use of factors in fixed income (here, here and here are good places to start). However, many of these strategies focus on CUSIP level bond selection. This means executing a strategy with a fair amount of turnover

Is it possible to time factors? (An old blog on the topic here and Jack discussing on a podcast here) Are there financial and economic indicators that can be used to predict factor returns? Are timing models just luck? What are the Academic Insights? YES. The authors use Fama-French 5 Factors

Not long ago I used to teach investment management courses to Master’s students (MBAs and MS Finance types). A core aspect of my course was so-called modern portfolio theory. We did a lot of math and problem-sets to make it feel like we were doing something useful. But I can summarize the core

“How can a q-theoretic model price momentum?” is a new paper by Robert Novy-Marx and goes right to the heart of an intense debate ongoing in empirical asset pricing — can neoclassic economic models explain the so-called momentum anomaly? A quote from the start of the paper, which answers the

The paper investigates the following research question: Are left-tail vs. right-tail correlations symmetric for the majority of risky assets (including size and styles)? Is left-tail vs. right-tail correlations between stocks and hedge funds styles symmetric? Is left-tail vs. right-tail correlations

Early in the summer, I was on a podcast with Corey Hoffstein discussing momentum investing. During the discussion, Corey asked me a question regarding risk versus mispricing, specific to the momentum anomaly. We frequently cite the behavioral explanation for momentum–investors tend to underreact

You can watch the video via the link below: Video Summary Ryan and I discuss three articles published on our blog this week. First, we examine a paper by Linda Zhang investigating the volatility of leveraged ETFs. Second, we discuss an article (and corresponding video and PPT slides from Wes)

We’ve covered momentum investing extensively over the years, to include 94 posts, a book on the subject, and numerous discussions on various podcast outlets. There are a few things one notices after thinking about a topic for so long: You forgot half of the things you read and/or wrote (yes, we

The paper investigates the following research question: What has the absolute risk behavior of leveraged products been historically? Did they behave as intended by design? Is the leverage multiple a reliable indicator of the volatility multiple? Is the leverage multiple a reliable indicator over

The 2014 study by Andrea Frazzini and Lasse Heje Pedersen, “Betting Against Beta,” found strong support for low-beta strategies. I’ve previously written on low-beta strategies here. This paper finds that, for U.S. stocks, the betting against beta (BAB) factor (a portfolio that holds low-beta

You can watch the video via the link below: Video Summary Ryan and I discuss three articles published on our blog this week. First, we examine a summary by Larry Swedroe that highlights the Betting Against Beta (BAB) factor and dives into two new papers examining when the BAB factor performs well.

Is it possible to build a simple systematic approach that beats investing in complex factor models? The research team here has proposed that a simple formula based on low return volatility, high net payout yield (dividends +/- stock buybacks), and strong price momentum gives investors exposure to

This article examines the magnitude of exposures to a set of systematic factors present in widely accepted Benchmarks (S&P500, the Russells, and MSCI global indices) and how they change over time. The authors use conventional style factors of value, size, quality, momentum, and minimum

Do users of social media provide valuable information about liquidity that can be used to predict future liquidity? Does social media provide useful information, over and above that provided by traditional, fundamental news sources? Do positive and negative sentiment have the same effects on

Imagine you are an alien. You land on planet earth in 1927 and are given a mission. You are told that you need to solve a problem: compound $1,000,000. The goal: compound your extraterrestrial face off. The options: FF_VAL: Top decile B/M, annually rebalanced, market-cap weighted. FF_MOM: Top decile

The paper investigates the following research question: Does persistence (out of sample performance) exist for alternative beta strategies sponsored by investment banks? Does adding complexity to a strategy increase the risk of backtesting overfitting? Do the strategies capture the factor exposure

Accruals are a part of any company’s financial reporting. For those unfamiliar with accrual accounting, a simple explanation is that accruals are adjustments made for (1) revenue that has been earned but not received and (2) costs that have been incurred but have not been paid. In short, one

Trading costs are a hot topic these days. The topic has sparked investor attention because of the rise of systematic factor investing strategies available via the ETF structure. It seems as if everyone is a “quant” these days, slinging money around like drunken pirates, destroying the price

Is there a relationship between real yields and short-term market valuation? Is there a relationship between inflation rates and short-term market valuation? Does the predictive power of the Shiller P/E improve by using yields and inflation? What are the Academic Insights? YES. The authors describe