ETF Investment portfolio example for EU (based on 5 risk factors)

[dreamingjoeinjail]

Hello!

Recently I've been very excited about 5 factor investing, to capture the most returns over the long term. Since I am in my 30s and planning to hold my investments for 30+ years it makes sense to invest for the best and more reliable result possible over long term. Here are the 5 factors:

Value

Value aims to capture excess returns from stocks that have low prices relative to their fundamental value. This is commonly tracked by price to book, price to earnings, dividends, and free cash flow.

Size

Historically, portfolios consisting of small-cap stocks exhibit greater returns than portfolios with just large-cap stocks. Investors can capture size by looking at the market capitalization of a stock.

Momentum

Stocks that have outperformed in the past tend to exhibit strong returns going forward. A momentum strategy is grounded in relative returns from three months to a one-year time frame.

Quality

Quality is defined by low debt, stable earnings, consistent asset growth, and strong corporate governance. Investors can identify quality stocks by using common financial metrics like a return to equity, debt to equity and earnings variability.

Volatility

Empirical research suggests that stocks with low volatility earn greater risk-adjusted returns than highly volatile assets. Measuring standard deviation from a one- to three-year time frame is a common method of capturing beta.

In EU we have a very poor choice of ETFs to invest in and they are relatively expensive, but this is my go on creating best diversified portfolio possible:

Ticker
Title
TER
Factor exposure
% of portfolio

VWRP
Vanguard FTSE All-World UCITS ETF (USD) Accumulating
0.22%
Market weight
65%

WSML
iShares MSCI World Small Cap UCITS ETF
0.35%
Size
10%

USSC
SPDR MSCI USA Small Cap Value Weighted UCITS ETF
0.30%
Value
10%

A1103D
Xtrackers MSCI World Quality Factor UCITS ETF 1C
0.25%
Quality
8%

IWFM
iShares Edge MSCI World Momentum Factor UCITS ETF (Acc)
0.30%
Momentum
7%

Weighted average TER: 0.249%

This portfolio is mostly based on market weighted index, but gives an additional exposure to value, small, momentum and quality stocks. All ETFs are globally diversified, except for USA Small Cap Value Weighted, which has only US stocks, because other regions are not available.

Would greatly appreciate any thoughts and advice on how to make this portfolio better. Is it sensible to invest with expenses of 0.25% at all? What do you think?

 

[lyso]

@dreamingjoeinjail What about investing in a single etf like the one below:
https://www.justetf.com/en/etf-prof...roupField=index&from=search&isin=IE00BJRCLL96

It seems to have all you want in one etf.

 

[dreamingjoeinjail]

@lyso Yes, I saw this one. 18m fund size is tiny, it has almost no liquidity now, maybe it will grow with time, but for now it's not a very wise choice. Second thing that bothers me is potentially high fund turnover and hidden costs because of that. Manager might need to do a lot of rebalancing.

 

[spst]

@lyso This looks great! My only concern is the relatively small fund size.

 

[lyso]

@spst It is quite small because it's so new, but given that there is almost no other EU etf that does the same, it could grow quickly

 

[how2101]

@lyso This is a really interesting fund. It's titled towards large cap value and claims to be a passive developed markets index fund.

However, the index is made by JPMorgan and the fund deviates greatly from it. As of 31 July, the utilities allocation of the fund is 10.6% vs 2.8% of the index. Not too passive. Also, developing markets and all small caps are skipped so an additional ETF is required if you wish to have broader coverage.

It appears to be an active fund disguised as an index fund to lure investors. It might have pockets of outperformance but long term is harder to say.

 

[davidandgoliath00]

@dreamingjoeinjail I'm pretty sure there's an "Europe Small Cap Value" ETF. That may be useful for you

 

[dreamingjoeinjail]

@davidandgoliath00 You probably mean SPDR MSCI Europe Small Cap Value Weighted UCITS ETF. Yes, good point. My only concern that fund size is 81m, but this is not so bad.

 

[uselessnumberone]

@dreamingjoeinjail What is the expected return vs 100% VWCE?

 

[dreamingjoeinjail]

@uselessnumberone In the document /@christianandy referenced below there is a chart and a table with historical data. Need to do the math on how the exact portfolio would do, but generally looking at the data you can see that factor investing outperforms MSCI World

Document:

https://www.msci.com/documents/1296...ntum.pdf/a766ef6b-cd24-4460-8163-900323fc2957

 

[christianandy]

@dreamingjoeinjail There’s a longer run backtest for anyone interested, I’ll find it, one sec.

Edit: Link

 

[mnzrt]

@dreamingjoeinjail How have you set up the % of each position ?

Concerning Small Caps:

It's said that only Small Caps VALUE (SCV) could outperform in the long run with long periods of underperformance, which means:

1. You need a World SCV ETF, that doesn't exist.
2. You have to believe that SCV will do their job in the long run and buy and hold during your whole investing life.

 

[lovelygrace]

@mnzrt That's correct.

Even Ben Felix has a video about the size factor, where he says that recent research shows that the size factor does not provide excess returns, but it comes back to life when combined with the value factor (small cap value).

 

[dreamingjoeinjail]

@lovelygrace Great point, thank you! I will look into replacing small cap with small cap value stocks.

 

[jakelab]

@dreamingjoeinjail I have a quite similar portfolio to your suggested one.

I do not know if it was a deliberate choice of you to not have a low volatility ETF in your portfolio, but I also don't have one because a big part of researchers do not see it as a separate factor --> Low volatility just exhibits higher quality.

My main differences:

• I have 70% market-weighted (you have 65%) so quite similar
• All factors are equal-weighted in my portfolio
• Size: I have USA and Europe Value weighted Small Cap
• Value: I have a world value not small
• Quality: Same (but not happy with it being sector neutral, but there is no other UCITS)
• Momentum: Same

 

[dreamingjoeinjail]

@jakelab Thank you, nice to see a different perspective on the same topic!

 

[kikizmommy]

@jakelab What USA Value weighted Small Cap ETF do you invest in?

 

[jakelab]

@kikizmommy This MSCI Small Small-Value: https://www.justetf.com/servlet/download?isin=IE00BSPLC413&documentType=MR&country=AT&lang=de

Btw, I am from Austria.

 

[homesick7]

@jakelab

Quality: Same (but not happy with it being sector neutral, but there is no other UCITS)

There are non-sector neutral ones for the USA (UBS) and Europe (Amundi), so you can cover most of the developed world. However they are heavy bets against value.

 

[svonaly]

@dreamingjoeinjail There's an interesting discussion about factor investing with UCITS ETFs in the Rational Reminder community.