Does it make sense to invest in both quality and equal weight ETFs simultaneously?

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jkfe
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Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by jkfe »

Quality and equal weight are factors that have indexes and ETFs that implement them.

Quality factor ETFs favors companies that have better rentability among other quality variables.
These usually seem to be larger and more expensive companies.

While, on the other hand, equal weight factor favors companies that are smaller and cheaper at the moment.

Given they have these opposite characteristics do you think it makes sense to invest in both at the same time?

Wouldn't that be a contradictory strategy in one's portfolio bringing the end result closer to a neutral ETF?
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ruralavalon
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by ruralavalon »

jkfe wrote: Tue Oct 19, 2021 6:22 am Quality and equal weight are factors that have indexes and ETFs that implement them.

Quality factor ETFs favors companies that have better rentability among other quality variables.
These usually seem to be larger and more expensive companies.

While, on the other hand, equal weight factor favors companies that are smaller and cheaper at the moment.

Given they have these opposite characteristics do you think it makes sense to invest in both at the same time?

Wouldn't that be a contradictory strategy in one's portfolio bringing the end result closer to a neutral ETF?
I am unclear on what you mean by "quality factors".

I don't use equal weight index funds.

In general I prefer very broadly diversified index funds (like total stock market or S&P 500) not focused on any market sector or on any of the 9 boxes of the Morningstar style box.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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jkfe
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by jkfe »

ruralavalon wrote: Tue Oct 19, 2021 7:42 am I am unclear on what you mean by "quality factors".
An ETF such as QUAL implements the MSCI USA Quality Factor index.

An ETF such as RSP implements the Equal Weight strategy.

That's what I mean by quality vs equal weight.
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retiredjg
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by retiredjg »

Still don't know what "quality factor" is.... :(

These discussions in the past usually involve market weight vs equal weight with market weight being the more Bogleheaded approach. Are you talking about that?
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nisiprius
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by nisiprius »

Well, I'm a total market guy... but this is a basic problem in factor investing.

Jared Kizer wrote:
Some factor premia have negative correlation with each other, namely value and momentum. Practically, it is impossible, therefore, to own a stock portfolio that is both deeply tilted toward value and deeply tilted toward momentum. At best, stock portfolios can be moderately tilted toward both. More generally, it is not feasible to build portfolios that capture significant amounts of multiple factor premia.
PortfolioVisualizer.com has a tool for performing factor regressions on portfolios, and in your situation I would use it, entering the actual ETFs I want to use, examining the factor loadings, and seeing how they accord with what factors I wanted to tilt toward. Assume there will be tradeoffs and that you need to decide how to make them.
Last edited by nisiprius on Tue Oct 19, 2021 11:24 am, edited 1 time in total.
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jkfe
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by jkfe »

retiredjg wrote: Tue Oct 19, 2021 11:07 am Still don't know what "quality factor" is.... :(
Search for "MSCI USA Quality Factor index" in google and you'll understand it.
Then search for QUAL ETF to see it in action.

nisiprius wrote: Tue Oct 19, 2021 11:14 am PortfolioVisualizer.com has a tool for performing factor regressions on portfolios, and in your situation I would use it, entering the actual ETFs I want to use, examining the factor loadings, and seeing how they accord with what factors I wanted to tilt toward. Assume there will be tradeoffs and that you need to decide how to make them.
Thanks. I'll take a look.
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jkfe
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by jkfe »

retiredjg wrote: Tue Oct 19, 2021 11:07 am These discussions in the past usually involve market weight vs equal weight with market weight being the more Bogleheaded approach. Are you talking about that?
No. I'm not talking about that. It's a different thing.

Not at least in that comparison.

I am indeed talking about the equal weight strategy that is also used in the market weight vs equal weigth discussion.
But now I'm not comparing it to maket weight. I'm comparing it to the quality factor.
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retiredjg
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by retiredjg »

Here is a definition I found of "quality factor" from the ETF Database which claims to be independent.

https://etfdb.com/themes/quality-factor-etfs/

Quality Factor ETFs are made up of securities deemed to exhibit strong fundamental characteristics. These ETFs screen for stocks that have healthy balance sheets, encouraging growth prospects, and consistent improvements in their earnings.

So it appears to be a bit of a stock picking scheme...kind of "creme de la creme". Also included is a list of ETFs that are using quality as a stock picking factor - there are a number of these ETFs to my surprise. Even Vanguard has one.
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jkfe
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by jkfe »

retiredjg wrote: Tue Oct 19, 2021 11:44 am Here is a definition I found of "quality factor" from the ETF Database which claims to be independent.

https://etfdb.com/themes/quality-factor-etfs/

Quality Factor ETFs are made up of securities deemed to exhibit strong fundamental characteristics. These ETFs screen for stocks that have healthy balance sheets, encouraging growth prospects, and consistent improvements in their earnings.

So it appears to be a bit of a stock picking scheme...kind of "creme de la creme". Also included is a list of ETFs that are using quality as a stock picking factor - there are a number of these ETFs to my surprise. Even Vanguard has one.
I'm pretty new to the ETF world.

While I see you are on the forum since 2008 with more than 45k posts.
And, still, the quality factor is news to you.

So guess this is something that is really not very popular and talked about huh.
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retiredjg
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by retiredjg »

A tip of the hat to you...as that is a really astute question. :happy

Basic Boglehead philosophy does not really embrace factors much. The basic philosophy is based on holding the entire market or a reasonable facsimile thereof, at market weights and staying with that portfolio (with adjustments for risk) for a very long time. I encourage you to get familiar - see the "getting started" link on the Wiki home page (link above).

Having said that, some (many?) Bogleheads investors do embrace factors. Back when I joined, the factors to watch were small cap stocks and value stocks (Fama French study) and I'd say the portfolios of many who have been here awhile would reflect that.

Over the years, some other factors appeared - momentum is one that comes to mind - but there has been little discussion that I have noticed about "quality" as a factor. As you can see from some other posts in this thread, I was not the only one who didn't know what you were talking about when you mentioned "quality factors".

That does not mean that it has not been mentioned, just that it has not gotten a lot of general discussion. If you put the words quality factor in the google search box above, you will see that quality as a factor has been mentioned several times, dating back almost a decade (which was a surprise to me! :shock: )

I'm sure there are people here who know what you are talking about and even some who hold QUAL. Whether you will get much response to your question, I don't know. As you guessed, it is just not something that has gotten a lot of attention here.

Welcome to the forum. :happy
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jkfe
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by jkfe »

Great. I'm also basing my strategy on holding the entire market.

My base ETF is VWRA (kind of a VT but domiciled in Ireland).

Then some factor ETF in lesser amount to spice it up a bit.

Thank you for the warm welcome.

I see there's great people around here.

Like TedSwippet that helped me a lot already on this other post:
viewtopic.php?f=22&t=359960&p=6274307

Thanks for the pointer to the Getting Started page.
I'll certainly take a look at it.

Looking forward to learn a lot with you all.
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retiredjg
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by retiredjg »

jkfe wrote: Tue Oct 19, 2021 10:50 pm Thanks for the pointer to the Getting Started page.
I'll certainly take a look at it.
Since you are not in the US, be careful about adopting all that you read in the Wiki. Much of the "getting started" page should be world wide generic, but a lot of other things will be "US centric" and not apply to you because they are based on the US tax system.

There has been an effort to put warnings to non-US investors on pages that apply only to US investors, but something may have fallen between the cracks.
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jkfe
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Re: Does it make sense to invest in both quality and equal weight ETFs simultaneously?

Post by jkfe »

Ok. Thanks for the advice.
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