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Thanks for the clarification. Question: Why should I still use an AllWorldETF when there is the WorldQuality ETF?
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@Epi Because factors do not consistently outperform the market.
If value companies had dominated the last 15 years, we would ask ourselves why not just buy value.
Also, for sufficient diversification, you need stocks that have different characteristics.
The ETFs only buy shares when they are well advanced in their development cycle and profitable, so a lot of growth is left behind.
It is not completely absurd to buy only a quality ETF or to weight it high, but you still bear model risk, which is unnecessary.
If value companies had dominated the last 15 years, we would ask ourselves why not just buy value.
Also, for sufficient diversification, you need stocks that have different characteristics.
The ETFs only buy shares when they are well advanced in their development cycle and profitable, so a lot of growth is left behind.
It is not completely absurd to buy only a quality ETF or to weight it high, but you still bear model risk, which is unnecessary.
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@Epi Very ingenious question and brute answer from @PowerWordChill 💪
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@PowerWordChill If you invest for the long term (>25 years), factors do not have to consistently outperform the market. It is enough if they lead to an average outperformance over the entire term. In my opinion, the quality factor does exactly that. So why the ACWI mixed goods store?
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@Epi Yes, but:
It's not a law of nature that the better ones do well. What happens if for some reason the market pushes unprofitable mid-caps and large-caps with high valuations? And under high volatility, so that momentum does not take effect either.
Unlikely but not impossible.
To minimize this model risk, it is good to have a marketcap ETF with you.
The aim is not to have the highest return but not to die poor. 😘
It's not a law of nature that the better ones do well. What happens if for some reason the market pushes unprofitable mid-caps and large-caps with high valuations? And under high volatility, so that momentum does not take effect either.
Unlikely but not impossible.
To minimize this model risk, it is good to have a marketcap ETF with you.
The aim is not to have the highest return but not to die poor. 😘
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@PowerWordChill A MarketCapETF is de facto a size-factor ETF that heavily overweights the megacaps. I would also interpret this as a model risk. This would give you the choice between two factors: size (= quantity) or quality. And in the case of a long-term commitment, I would intuitively always opt for quality, as with the wife, the job, the house...
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•@Epi You can also simply take all the factors and rebalance regularly.
This should also generate an excess return. With low risk.
https://portfoliocharts.com/2022/04/12/unexpected-returns-shannons-demon-the-rebalancing-bonus/
This should also generate an excess return. With low risk.
https://portfoliocharts.com/2022/04/12/unexpected-returns-shannons-demon-the-rebalancing-bonus/
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@PowerWordChill Of course you can do that. However, if I don't want to rebalance and want to collect the premium of at least one factor in the long term, which factor should I choose?
I would probably opt for the most stable of all: Quality.
I would probably opt for the most stable of all: Quality.
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@Epi you don't know that beforehand, there was a time when value was stable and it has underperformed for the last 10 years 😅
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@PowerWordChill Pff, 10 years is not long term. 😅
The value factor is also likely to outperform again in the long term. Some factor seems better than none at all.
The value factor is also likely to outperform again in the long term. Some factor seems better than none at all.
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