Seeking More Than One Factor Can Boost Returns


One of the current trends within the investment industry is to focus on factors. Also referred to by the monikers “smart beta” and “strategic beta,” factor investing involves buying stocks with certain, quantifiable characteristics. Factors include low valuation, small size, price momentum and many others.

There has also been a proliferation of factor exchange-traded funds (ETFs). Even Vanguard joined the party earlier this year with its own factor ETFs. Some of these offerings from the various ETF providers have a singular focus [e.g., iShares Edge MSCI USA Momentum Factor ETF (MTUM)], while others use several factors [e.g., SPDR MSCI USA StrategicFactorsSM ETF (QUS)]. With this proliferation, a natural question emerges: Which is better?

A new study sought out the answer. Its insight has relevance for both ETF investors and those of you who prefer to invest in individual stocks. Before going into the details and discussing how it relates to what we do with the AAII portfolios, I’ll jump right to the conclusion: returns are better if factors are mixed rather than targeted on a single basis. In other words, don’t just focus on value, but combine value with additional factors. The same goes for many other factors, such as momentum and size.

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More on

  • Weight by Fundamentals, Not by Price – Robert Arnott is one of the people credited with popularizing smart beta strategies. He explained why allocating based on fundamentals instead of market capitalization makes more sense.
  • How to Take Advantage of Risk Factors – Factors are not only useful for identifying attractive stocks, they can also help you to diversify your portfolio.

Highlights from this month’s AAII Journal

AAII Sentiment Survey

Optimism fell for a third consecutive week, but remains within its typical historical range. Plus, this week’s special question asked AAII members how comfortable they are with current stock valuations. More about this week’s results.

This week’s results:
  • Bullish: 29.1%, down 2.4 points
  • Neutral: 38.8%, down 2.8 points
  • Bearish: 32.1%, up 5.2 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.

AAII Asset Allocation Survey

Allocations changed just slightly last month. Plus, AAII members discuss whether they intentionally include stocks with different market capitalizations in their portfolios. More about the latest results.

July AAII Asset Allocation Survey results:
  • Stocks and stock funds: 68.3%, down 0.3 percentage points
  • Bonds and bond funds: 15.9%, up 0.2 percentage points
  • Cash: 15.9%, up 0.2 percentage points
July AAII Asset Allocation Details:
  • Stock Funds: 36.7%, down 0.1 percentage points
  • Stocks: 31.6%, down 0.2 percentage points
  • Bond Funds: 12.5%, no change
  • Bonds: 3.4%, up 0.1 percentage points

Take the Asset Allocation Survey.

What’s Trending on AAII

The Week Ahead

Close to 50 members of the S&P 500 index are scheduled to report, as earnings season shifts to smaller-sized companies. Among those on the calendar is Dow Jones industrial average component Walt Disney Co. (DIS), which will report on Tuesday.

The week’s first economic report will be the June JOLTS report, released on Tuesday. Thursday will feature the July producer price index (PPI). The July consumer price index (CPI) will be released on Friday.

Federal Reserve Richmond president Tom Barkin will speak on Wednesday.

The Treasury Department will auction off $34 billion of three-year notes on Tuesday, $26 billion of 10-year notes on Wednesday and $18 billion of 30-year bonds on Thursday.

Local Chapter Meetings

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

Upcoming Meetings »


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