Global Factor Performance: September 2024
The following factor performance modules have been updated on our Index website.[ref]free access for financial professionals[/ref] Factor Performance Factor Premiums Factor Data Downloads
Adding Leveraged, Long-Short Factor Strategies to Improve Tax Alpha
Joseph Liberman, Stanley Krasner, Nathan Sosner, and Pedro Freitas, authors of the September 2023 study “Beyond Direct Indexing: Dynamic Direct Long-Short Investing,” examined if the utilization of leverage and long-short strategies motivated by the literature on factor-based investing could improve on the tax benefits of direct indexing and tax-loss harvesting.
Exploring Bond Tax Efficiency: Futures or Bond ETFs?
Bond futures are often assumed to be more tax-efficient than bond ETFs. My analysis indicates that this assumption is frequently incorrect. Although investors might view the 60/40 tax treatment of futures as advantageous, a futures strategy faces several challenges compared to a bond ETF, including frequent taxable events, potential tax drag from cash collateral, and additional state taxation. My analysis suggests that, between July 2002 and July 2024, the bond ETF wins under a variety of realistic assumptions. However, bond futures may be compelling for high-tax investors, especially if they can find a tax-efficient cash solution. There is no universally “tax-efficient” instrument between bond futures and bond ETFs; rather, tax efficiency is defined by the investor’s particular circumstances.
DIY Trend-Following Allocations: September 2024
Do-It-Yourself trend-following asset allocation weights for the Robust Asset Allocation Index are posted here. (Note: free registration required) Request a free account here if you [...]
Can smart rebalancing improve factor portfolios?
This paper provides new evidence on the efficacy of prioritizing transactions so as to focus portfolio turnover on the trades that offer the strongest signals and hence the highest potential performance impact.
The After-Fee Performance of Private Debt
Private debt funds are a rapidly growing segment of the private capital market. Isil Erel, Thomas Flanagan, and Michael Weisbach, authors of the April 2024 [...]
From Man vs. Machine to Man + Machine: The Art and AI of Stock Analyses
An AI analyst trained to digest corporate disclosures, industry trends, and macroeconomic indicators surpasses most analysts in stock return predictions. AI wins when information is transparent but voluminous. Humans provide significant incremental value in “Man + Machine,” which also substantially reduces extreme errors.
Evergreen Private Equity Funds Attracting Assets
Evergreen funds are a relatively new concept in the private equity (PE) world compared to traditional closed-end funds. They were introduced to address the negatives of the traditional way to invest in private equity which had been in the form of partnerships.
Fixing the poor performance of the book-to-market ratio
The authors effectively argue the case for intrinsic value and DCF based approaches to building Value factor strategies. The traditional value measures, especially the book-to-market ratio, are described as ineffective in today's market environment.
The Effect of ESG Strategies on Global Equity Returns
To determine the impact of sustainable investment strategies on equity returns, Romulo Alves, Philipp Krueger, and Mathijs van Dijk analyzed the relationship between ESG ratings and global stock returns. They found very little evidence that ESG ratings were related to global stock returns over the two-decade period.
Global Factor Performance: August 2024
The following factor performance modules have been updated on our Index website.
High school financial education courses in the United States
This article provides detailed insights into how high school financial education policies are implemented at the local level.
Overvalued or New Paradigm?
Without question the topic of greatest debate among investors, including investment professionals, and financial economists, is whether or not the market, and the technology sector in particular, is overvalued. There are two very strong conflicting views regarding not only the current valuation of technology stocks, but also the valuation of the entire asset class of large-cap growth stocks. One side, I’ll call the “new paradigm” or “it’s different this time” school. The other side, I’ll call “the been there, done that” school. Its theme is those that don’t learn from the past are doomed to repeat the same mistakes. No two sides could have more different viewpoints. To understand each side, let’s imagine a dialogue between the two schools.
Factors and Taxes
As a result of the trading required to capture the premiums that drive factor strategies investors may face significant tax liabilities. The challenge for the [...]
The Value of WallStreetBets Investment Research Recommendations
Wallstreetbets has become an increasingly prominent source of investment research. Do their recommendations have value?
DIY Trend-Following Allocations: August 2024
Full exposure to domestic equities. Full exposure to international equities. Full exposure to REITs. No exposure to commodities. Partial exposure to intermediate-term bonds.
Transitioning from an ETF to Direct Indexing? Bad Idea.
Many investors face the complex decision of whether to transition from a diversified ETF to direct indexing. When is this switch a poor investment choice? My findings suggest that many investors are better off avoiding it. Direct indexing remains attractive even with a decent amount of embedded capital gains, up to approximately 40% of initial investment, for investors in the highest marginal income tax bracket. However, for lower-tax investors with a marginal income tax rate of 22%, ETFs often prove more advantageous: when embedded capital gains exceed 10%, a consumption-focused investor is better off staying in an ETF. While the other benefits and costs of direct indexing are difficult to quantify, my results indicate that it is far from a universal solution. Investors with high embedded gains and lower tax rates should approach direct indexing cautiously.
Transaction costs for asset allocation and foreign exchange markets
Transaction costs have a first-order effect on the performance of currency portfolios. Proportional costs based on quoted bid–ask spread are relatively small, but when a fund is large, costs due to the trading volume price impact are sizable and quickly erode returns, leaving many popular strategies unprofitable.
The Negative Impact of Crowding on Active Fund Performance
The shrinking pool of public companies across which active funds can diversify their holdings, increases the risk of crowding, which the research we reviewed shows negatively impacts performance. That provides yet another reason for investors to choose to avoid playing the loser’s game of active management.
Using Bayesian Solutions to Resolve the Factor Zoo
We propose a novel framework for analyzing linear asset pricing models: simple, robust, and applicable to high-dimensional problems.