People are always looking for a way to beat the market.
Whether they just want bragging rights at the golf club bar, or their share of the 2.0% and 20.0% fees charged by a hedge fund manager.
The good news is that it's not impossible to do this, even as a retail trader, thanks to the existence of ETFs, or Exchange Traded Funds, which create asset allocation opportunities.
It's not so much the fact thatETFs exist as the fact that there are so many to choose from and that the ETF managers are very generous with their information (or at least those who manage passive or trackingETFs are).
These are funds that try to replicate the returns from a particular index, sector or investment style (factor). They do this by owning a basket of stocks or other securities in similar proportions to the index that they are tracking.
With a factor or style ETF, it gets a bit more complicated.
However, the good news for retail traders is that you don't have to worry about that, because academics and strategists have already crunched the numbers and have created products for you.
For example, the SPDR SSGA US Large Cap Low Volatility Index ETF (Ticker LGLV)
Quite a mouthful, isn't it?
But in essence, the ETF “is designed to measure the performance of U.S. large capitalization companies that exhibit low volatility.”
That is, stocks which don't experience wild price swings or at least are less susceptible to them.
Looking at the year-to-date performance for this ETF versus the broader S&P 500 index( drawn in blue), we can see that low volatility has comfortably outperformed..
Source: Barchart.com
Now, not allETFs are available to retail traders simply because some jurisdictions require the ETF managers to organise their funds in specific formats, and produce KIDS or Key Information Documents and other paperwork.
Some ETF managers choose not to do this, and their funds are off-limits to retail traders
But don’t despair because you can often still get exposure to the theme that the ETF tracks by trading in the stocks it holds.
Information about which is made available by the managers of the ETF, in this case, State Street Global Advisors or SSGA.
SPDR SSGA US Large Cap Low Volatility Index ETF top holdings
Source: SSGA.com
The biggest individual holding in LGLV is Linde PLC (Ticker LIN ), which I have added to the LGLV chart in orange below.
Source: Barchart.com
We can see that the price of Linde moves with that of LGLV and vice versa.
However, Linde has outperformed the ETF year to date.
No diversification
Of course, if you buy a single stock, you don't get the diversification of an ETF, but given that, in this instance, we would be looking to gain exposure to a specific investing style or factor, I don’t think that’s too much of an issue.
Life is rarely that straightforward, of course, and markets rarely move in a straight line because the narratives and sentiments within them can quickly change.
If we look at the table below, which tracks the performance of factor and style indices in the US, over three different time scales (this version was published on April 30th), we can see that low volatility was down in April and that momentum and growth were rallying.
S&P Factor Index Performance
Source: S&P DJI Research
In fact, MTUM US, the iShares MSCI USA Momentum Factor ETF, rallied by more than +10.0% over the last 10 trading days.
Source: Barchart.com
By watching the price action in, and the interplay between factor ETFs, traders can gain an insight and a potential edge when it comes to deciding where the market’s going, and what is moving in and out of favour with investors.
Once you have a handle on that, then it should be possible to beat the market.
That is, as long as you don't forget to follow your process, money and risk management rules, etc., etc.
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