It is common to construct a portfolio using the framework of asset allocation or what we traditionally call, Strategic Asset Allocation. This is how the Robo Advisors build their portfolios. Most of the ITA portfolios use this approach when fitting the various portfolio pieces together. Constructing a portfolio around Factors or market anomalies is a different approach, although you will see overlapping ETFs.
The first screenshot below shows what ETFs fit into the investment quiver. I’ll explain the color coding as these match the different factors described in recent blogs. Over on the right I’ve added an Expense Ratio column, although I have yet to fill in the percentages.
The second screenshot shows the familiar Tranche worksheet from the Kipling. Concluding this blog is the Manual Risk Adjustment worksheet, assuming this is a $100,000 portfolio.
Factor Portfolio Investment Quiver: In addition to ETFs representing the eight factors, I added SCHH so as to cover U.S. REITs. Consider this to be a first draft of a Factor portfolio. Here is the legend for the various colors.
- The top three ETFs with the dark blue background cover the Beta factor.
- SCHA through EWX are Size ETFs. Note that all are small-cap.
- ETFs with the dark green background (SCHV – VFVA) pick up the Value Factor.
- MTUM and VFMO (purple background) are the Momentum representatives. Since the Kipling is momentum driven, we have this factor completely covered.
- QUAL – IQLT are three Quality ETFs. Productivity applies more to analyzing individual stocks. However, these Quality ETFs cover the Productivity factor. With these six factors we blanket the equities market.
- When I think of the Term factor I think of bonds and treasuries. ETFs with the brown background fully represent this factor.
- We are left with Carry. Berkin and Swedroe have a single recommendation, DBV.
- I added SCHH or U.S. REITs as it frequently plays a major role in portfolio returns.
Commodities and Gold are not a permanent part of the Factor portfolio.
Factor BHS Recommendations: If the Max Number of Assets is set to five (5), below are the ETFs recommended for inclusion in this sample Factor portfolio.
Factor Manual Risk Adjustments: I adjusted the Maximum Portfolio Risk to 10% so as to use up most of the cash. Note what factors show up for inclusion.
- SCHA represents the Size factor. Keep in mind that we don’t need every factor represented.
- VBR is our Value ETF. VBR is a small-cap value ETFs so we pick off two factors (size and value) with this single ETF.
- Two Quality/Prodictivity ETFs hit the jackpot and they are: VFQY and IQLT.
- SCHH is the last selection and it is my REIT addition to the basic eight factors.
I’m not recommending everyone rush to the broker and follow this model. Let me be the canary in the coalmine or the lab rat.