Cheaply Incorporating Factors Into a Core U.S. Equity Portfolio

As we continue to manage this core U.S. equity portfolio in real-time, we maintain a core passively indexed portion of the portfolio, and also at all times include representation from each of the six aforementioned factors, either overweighting or underweighting the factors based on our fundamental and technical analysis. Here is a sampling of some of our current stances:

  • Dividends: We favor dividend growers (DGRO) over higher dividend payers (HDV), which our portfolio team sees as overvalued. Consumer Staples and Utilities, in particular, are historically overvalued.
  • Momentum Factor: We currently marketweight the factor (via MTUM) and, we would note, normally lean towards not underweighting the factor due to its historically strong returns, non-correlation to other factors, and subsequent diversification benefits.
  • Low Volatility: As of August 12th, USMV’s forward P/E was 24.14, versus a 21.15 P/E for the MSCI USA Index, from which USMV is constructed.  We are underweight the factor, as historic overvaluation and lower forward-looking growth rates for lower volatility stocks give us pause on the volatility factor in particular.

In assembling this core U.S. equity ETF portfolio, we believe there are some key potential benefits and takeaways for the average investor:

  • For well under 20 basis points, investors get a portfolio that features seven historically successful but unique investment styles (passive indexing plus the aforementioned six factors). This shows how profoundly ETFs have changed the investing landscape.  Imagine five to 10 years ago, when investors’ options to build such a portfolio were limited to using individual stock SMAs and mutual funds, potentially requiring higher minimums and higher costs, delivering less liquidity and possibly needing substantial monitoring.
  • One important fact to keep in mind is that all of the factor ETFs that we use are large and mid cap focused only. In our opinion, there is a gap yet to be filled in the market for an established, low expense, multifactor or single factor pure small cap ETF.
  • Profitability has emerged as a factor being prominently discussed in academic finance. Going forward, we could add that to the portfolio as a seventh factor.  Our remaining questions include: Is profitability a unique factor that is not correlated to other investment factors (does it provide real diversification benefits)? Is there a broadly popular, low cost ETF to achieve exposure? So far, we have not found enough answers to achieve exposure to profitability.

In summary, within the core U.S. equity sphere, Clark Capital prefers using single factor ETFs over multifactor ETFs because single factor ETFs tend to have lower expense ratios, and they provide you, as the investor, greater control over the risks and bets that your portfolio takes on. In this article, we have described how such a portfolio can be assembled using ETFs that all have expense ratios of 20 basis points or lower. We believe that what makes this portfolio compelling is that without taking large bets or deviations from a broad benchmark like the Russell 3000, the portfolio historically has modestly reduced investors’ risks and volatility while modestly enhancing returns.

Mason Wev, CFA, CMT is a Portfolio Manager at Clark Capital Management Group, a Participant in the ETF Strategist Channel.


Disclosure Information

Model results are hypothetical and do not reflect trading in actual accounts and are prepared with the benefit of hindsight. The model performance is a blend of roughly half traditional indexing and half an equal weighted mix of six equity factors. The model performance is discussed for informational purposes only and should not be interpreted as actual historical performance of Clark Capital Management Group. Model results do not represent actual trading in client accounts, nor do they reflect client-specific activities, such as contributions, withdrawals, or restrictions. In addition, such results may not reflect the impact that material economic and market factors may have had if accounts had actually been managed by Clark Capital during the entire period portrayed. Actual returns experienced by individual clients will differ due to many factors, including individual investments and fees, individual client restrictions, and the timing of investments and cash flows. Neither past nor hypothetical performance guarantees future results. Clients should not rely solely on this performance or any other performance illustrations when making investment decisions. Actual performance results may differ from model results. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies.

The Russell 3000 Index measures the performance of the 3,000 largest U.S. Companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. The volatility (beta) of a client’s portfolio may be greater or less than the benchmark. It is not possible to invest directly in this index.

The opinions expressed are those of the Clark Capital Management Group Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investment portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account’s portfolio. It should not be assumed that any of the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services can be found in its Form ADV which is available upon request. CCM-978