Combining Complementary Factors: Momentum and Value ETFs

Continuing our focus on building smart ETF portfolios, we have with us today Rohit Mehta, Executive VP, First Asset Exchange Traded Funds. We are going to look at Value and Momentum strategies that First Asset has brought to Canada. They are one of the early adopters of these smart indexing strategies in Canada.

Value: characteristics that a Warren Buffet would look at like the price-to-book or the price-to-earnings of a company measure how cheap a stock is relative to others. It has been found that on average, over time, cheaper stocks tend to out-perform all stocks.


Momentum: stocks with the strongest price trends, e.g. stocks with the strongest out-performance relative to other stocks as measured over the previous 12 months also tend to continue to outperform.


The long-term history of the underlying indexes these ETFs track have been impressive. But there are some caveats. For example, avoiding Nortel would have seen all portfolios underperform the TSX from 1998 to 2000, and subsequently outperform significantly as to fell from over 30% of the TSX to zero nine years later. Sometimes, history can be deceiving, so you should always look under the hood. But avoiding Nortel is what you would expect from a value manager when the value just is not there. Valeant (VRX) is another example of one that would have been avoided in a value approach, but might have been included in a momentum approach.


Going back to 2012, there have been 7 periods where the S&P/TSX Composite Index (the “Index”) had returns of -5% or lower. On average, the Value and Momentum strategies outperformed the Index during those periods.


This leads us to the topic of risk-adjusted returns. Regular viewers will be familiar with the way I have tried to pound home this message for years. The biggest cost to investing is not the MER, which are 67 and 68 bps, but your ability to handle the ride (volatility). Building portfolios to help average returns and reduce overall volatility are essential to improving your odds of success.bnn_nov_14_5

But since no one knows when these styles will lead or lag and using all of them in a strategy can have significant benefits in reducing risks and enhancing average returns. Bottom line, no style, no strategy, no fund beats the market all the time. One of the secrets of long-term success in portfolios is your ability to handle the ride. The volatility of returns is the single biggest cost to investing.


Learning how to use these smart index approaches will help. The excess index performance (compared to market cap) adjusted for risk is real. These smart approaches on average have delivered superior returns over time, while on average reducing risk through style diversification. While they have only recently (5 years) been put into ETF structures, you can trust the longer-term efficacy versus the market cap approach. You just need to understand how to use them in your portfolios so that you can sleep better at night. This is the topic of my current educational speaking tour across Canada. Learn how to be a smarter investor in our 7th season across Canada speaking tour. Free registration at  Help us raise money to fight Cancer and Alzheimer’s by making a voluntary donation with your registration. Over the past few years, Berman’s Call roadshows have raised over $175,000 for charity thanks to BNN viewers and our sponsors.

As always, watch this segment online at for the full interview.

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