Theodore: The effectiveness of factors has been postulated by academic research but only when given enough time for the factor to influence results.
In practice, most factor research suggests this time frame must be measured in years – typically five years or more. What this means practically is that there can be periods of time, lasting 1-2 years, when the factor is out of favor and not delivering on its longer-term promise.
Indeed, most of the popular factors are volatile. So, for example, the “value” factor has been a very big disappointment over the last 18 months or so. Should a period of relatively disappointing short run performance occur in a sideways to down market, the negative impact is clearly magnified. It seems unlikely investors are aware enough about the volatility of factors.
ETF Trends: What are the advantages of combining free cash flow with stock buybacks?
Theodore: As indicated above, buybacks financed with debt can create long term challenges to companies. On the other hand, if a company has strong enough free cash flow, it can finance share reduction by utilizing a portion of that free cash flow instead.
An additional consequence is that the latter kind of company is typically growing more rapidly and improving its finances at the same time. That is a formidable combination in a market where many are cautious about the economy and interest rates.
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