I wanted to refresh my wife's portfolio and not just put it into an MSCI World or FTSI World. So I asked ChatGPT how I can set up a savings plan with the following conditions:

Individual positions < 10%

Individual stocks: Siemens AG, Microsoft, BTC and gold

Defense industry

Construction and infrastructure sector

Momentum

Robots sector

AI sector

Nuclear industry

The following constrellation came out at 2x200€/month:

Individual stocks: 32%

8% Siemens AG $SIE (-2,94%) 2x16€ =32,00 €

8% Microsoft $MSFT (+0,58%) 2x16€ =32,00 €

8% Bitcoin $BTC (-0,62%) 2x16€=32,00 €

8% Gold $WGLD (-1,48%) 2x16€=32,00 €

ETFs 68%:

20% multifactor ETF $IBCZ (-0,69%) 2x 40€ = 80€

12% Robotics ETF $AAKI (-1,37%) 2x 24€ = 48 €

12% AI ETF $INTL (-2,2%) 2x24€ = 48 €

12% Nuclear ETF $NUKL (-0,99%) 2x24€ = 48 €

7% Infrastructure ETF $EXV8 (-1,64%) 2x14€ = 28 €

5% Defense ETF $ASWC (-0,64%) 2x10€ = 20 €

Why all this:

The selection offers better access to momentum in the short, medium and long term and less vola in the overall picture. A total of 570 companies are included and 2 assets.

I would be very happy to receive feedback or suggestions. Thank you!

Disclaimer: No investment advice or recommendation, this article is for information purposes only. Before you decide on an ETF, take a closer look at it in terms of positions, sampling, regions, etc. I can't describe everything here as it would go beyond the scope of this article.

Part 1 (Definition, Categories

& Z-score and quality factor): https://getqu.in/RCSY4a/

Part 2 (Value ETF): https://getqu.in/Nfnhqb/

Part 3 (Low Volatility ETF): https://getqu.in/Ub7KpG/

Part 4 (Momentum ETF): https://getqu.in/CNMgGw

Part 5 (Small- and Growth ETF): https://getqu.in/0NoqmW/

Part 6 (Dividend ETF): https://getqu.in/NJtoF5/

What are multi-factor ETFs?

As the name suggests, multi-factor ETFs contain several tilts and are therefore not pure plays on certain factors. The theoretical foundation here is also the CAPM/French Fama model, according to which the expected stock return is expressed by premiums: Volatility, Size & Value. Multi-factor ETFs use several of these factors to outperform their respective parent index (or to achieve low risk). By combining different factors, this form of ETF is more active than the smart beta factors previously considered.

Historical returns

It is not really possible to say whether outperformance can really be achieved due to the limited data currently available. Many of these ETFs have only been around for a few years. A comprehensive study of multi-factor ETFs to date concludes that multi-factor ETFs have underperformed both the US and global markets (while down-side protection paints a mixed picture). Study:

https://pmc.ncbi.nlm.nih.gov/articles/PMC10225753/

However, in my opinion, no general conclusion can be drawn here, as we have already seen in previous parts that the individual factors such as size, volatility and dividends have underperformed in the recent past. It is therefore only logical that the multi-factor approach has also underperformed in the recent past.

👉Multifactor-ETFs:

$HWWA (-1,06%) (World | TER 0.25 % | TD n.A. | 1.3 bn Invested Vol. | 3Y underperformance vs. All-World -0.2% ppt. | 5Y underperformance -0.2%pt. | 10Y underperformance -14 %pt.)

Index methodology: Relevant stocks are identified from the parent index (MSCI All Country World Index) using the following factor weightings:

(1) Value: low kgv/kbv , high dividend yield is preferred

(2) Quality: stable earnings high return on equity

(3) Momentum: shares that have shown above-average price performance in the recent past are preferred

(4) Low risk: stocks with lower volatility than the overall market are preferred

(5) Size: Smaller companies (small caps) with potential for above-average growth are preferred.

• The fund may invest up to 10% of its assets in derivatives such as total return swaps and contracts for difference.

$IBCZ (-0,69%) (World | TER 0.50 % | TD 0.31 %.| EUR 0.5 bn invested. | 3Y underperformance vs. All-World - 4%pt. | 5Y underperformance - 11 %pt | 10Y underperformance - 34%pt.)

• Index methodology: Focus on Value, Momentum, Quality & Size (Small Cap). The aim is to achieve a similar risk profile to the All-World. The factors are weighted and risk rated using MSCI's "Barra Equity Model". This uses over 40 data metrics for each share and provides a value-at-risk figure for each share, among other things. The focus factors are used to determine a weighting for the positions, which are then adjusted on the basis of risk measures, e.g. country and sector weightings may not deviate from the starting index by more than 5%.

$GERD (-1,68%) (World | TER 0.5 % | TD n.a. | 0.4 bn invested vol. | 1Y underperformance vs. All-World -5%pt.)

• Index methodology: Gerd Kommer's index should not be omitted here for reasons of respect for his performance alone. In addition to size, momentum, value & quality, country weightings of 50% by GDP and 50% by market capitalization are also applied here, as well as minor gimmicks such as the exclusion of stocks around the IPO period and in the case of high short interest. Dedicated analysis: https://www.youtube.com/watch?v=3IWp5OHn4Ps

$FEX (US | TER 0.65 % | TD n.a. | EUR 0.2 bn invested volume | 3Y underperformance vs. S&P 500 - 13 %pt. | 5Y underperformance - 30 %pt. | 10Y underperformance vs. S&P 500 - 134 %pt.)

• Index Methodology: Mix of growth and value factors. Growth factors: Momentum (3, 6 & 12 month price increases), sales multiple, 1 year sales growth. Value factors: Price to book ratio, cash flow to price ratio, return on equity. Valuation of shares from the parent index (Nasdaq US Large Cap 500) based on these factors, allocation & weighting according to quintiles, top quintile approx. 33% weighting, 2nd quintile 27%, etc. Quarterly reweighting

$IBC0 (-0,83%) (Europe | TER 0.45 % | TD 0.22 % | EUR 0.2 bn invest vol. | 3Y outperformance vs. EuroStoxx 600 + 2%pt. | 5Y outperformance + 6 %pt. | 10Y outperformance + 8 %pt.)

• Index methodology: the "Barra Equity Model" is used to select a factor from the parent index (MSCI Europe Index for large and mid-caps) via the factors: value, momentum, quality

Conclusion - what remains?

Multi-factor ETFs try to achieve an edge over the parent index by combining various factors, true to the motto: a lot helps a lot, the shares are screened according to various factors such as size, value, momentum etc. in order to achieve a higher return with the same or lower quality with this "egg-laying wool-milk sow". However, precisely this complexity can also be a disadvantage, as screening according to many factors can mean that some factors influence each other and are therefore not as highly weighted in the index.

Unfortunately, the data is not yet sufficient to make a statement about the investment case of these multi-factor ETFs, but the short-term returns over the past 10 years have lagged behind those of the parent indices (as the individual factors have often performed worse).

#smartbeta
#multifactor
#etf

World vs World Value (vs World Quality vs World Momentum)

Facts, figures and data (as at 06/2024)

Seriously now? The third post within a few days in the same pattern? Don't you have to look after your child? 🤦

Yes, I do. But in the first article in this series [1] @FlorianoPerlini asked me to compare the MSCI World Index not only with the MSCI World Momentum Index, but also with Quality [2] and Value. And since I was in a giving mood, I complied with this request and end the series with this comparison of World vs Value. At the end there is also a conclusion on World vs Value vs Quality vs Momentum.

All right. Let's get it over with then. Will there be another plot twist at the end this time?

Nope. There is one right now. Just as there are no ETFs on the MSCI World Quality Index [2], there are none on the MSCI World Value Index [3] [4]. Instead, some ETFs use the MSCI World Enhanced Value Index [5] as a basis. This is a shame because the MSCI World Value Index has been around for 50 years and in those 50 years it has outperformed the MSCI World Index by an average of 11.33% vs 10.96% per annum. Even though it has not stood a chance against the MSCI World in the last 10 years.

In comparison, the MSCI World Enhanced Value Index has only been around since 1997, and although it has beaten the MSCI World since its inception, it has performed even worse than the MSCI World Value Index over the last 10 years.

Stop talking, I'm here for the numbers! But this time please compare with an index that actually exists as an ETF.

Okay. Here are the average annual returns of the MSCI World Index, MSCI World Value Index and MSCI World Enhanced Value Index over the last X years:

5 years, World: 13.31%, Value: 9.89%, Enhanced: 9.02%

10 years, World: 9.71%, Value: 6.9%, Enhanced: 5.43%

27 years (Enhanced edition), World: 6.95%, Enhanced: 8.4%

50 years (Value edition), World: 10.96%, Value: 11.33%

I suck at math. Impress me with absolute numbers!

Sorry, this time it will be less impressive.

If you invested USD 10,000 in the MSCI World 50 years ago, you would have invested USD 1,812,685.25 today. If you had opted for the MSCI World Value Index instead, you would now have USD 2,140,969.36.

If you invested USD 10,000 in the MSCI World 27 years ago, you would now have USD 61,359.42. If you had opted for the MSCI World Enhanced Value Index instead, you would now have USD 88,265.42.

So the differences are not that big. In addition, you will probably hear the fees for a value ETF, which will further reduce the advantage.

Hmmm, is the risk at least lower then?

The maximum drawdown of the World over the last 27 years is 57.82%, that of Enhanced Value 62.01%. The Sharpe ratio is 0.36 for the World and 0.42 for the Enhanced Value. Further comparative values can be found at [5]. The comparative figures for the Value Index can be found at [4].

So the facts for World, Momentum, Quality and Value are on the table. Which one should I buy?

All three have proven that it is possible to beat the global equity market with a single index over the long term. In my view, all three are suitable, in combination or on their own, to form the core of a portfolio or to act as satellites. However, there are no ETFs that track the Quality and Value indices. If you opt for an ETF on a related index, it should be analyzed beforehand. Alternatively, the underlying strategy of the index can of course also be pursued with individual shares.

In the case of Value, it is noticeable that it has performed significantly worse than the other two in recent years and has also failed to beat the World Index. Due to the historically better return compared to the MSCI World, the regression to the middle could suggest that Value could perform better again in the near future and Quality / Momentum somewhat worse.

But these are all guesses. Ultimately, everyone has to decide for themselves whether it should be a World, one of the factor indices mentioned, a combination or something completely different. Of course, you could also invest in a multi-factor ETF such as $IBCZ (-0,69%) or $K0MR (-0,99%) for example. However, if you do this, please familiarize yourself with the underlying indices beforehand.

And what do you do now with these findings?

As part of my company pension plan, I have so far saved in a world ETF. I have reallocated 50% of this to a momentum ETF and 50% to a quality ETF. My ETF portfolio will remain unchanged for the time being. As soon as my positions are full, however, I will think again about whether and, if so, which factor I should add to my portfolio in future and with what weighting.

PS: The GIF is for @Alpalaka 😘

sources (the fact sheets are constantly updated, this post is not)

[1] https://getqu.in/CDEnfS/

[2] https://getqu.in/HhbBYl/

[3] https://www.justetf.com/de/how-to/invest-in-value-etfs.html

[4] https://www.msci.com/www/fact-sheet/msci-world-value-index/06457479

[5] https://www.msci.com/documents/10199/174e3915-2087-4c5b-815b-c1b7ea1ccbbf