RR #129 – Five Factor Investing with ETFs

Stock Market

After months of research, number-crunching, and receiving listener requests on the subject, today’s episode is devoted to introducing our new model ETF portfolios — which promise to offer a smoother ride to getting reliable returns. We open our conversation with a financial news roundup and by touching on our book of the week. We then dive into the theory behind our model by first exploring how market assets are priced. We discuss historical views on asset pricing models before looking at what academia has done to overcome challenges to the idea of market efficiency. Host Benjamin Felix methodically shows how our model addresses the five systematic risk factors that are included in the Fama-French Five-Factor Model. From emerging markets to stock size, we share insights into what our model accounts for and how this should impact your portfolio distribution and premium expectations. After reflecting on how factor-loaded indexes get higher returns without extra risk, we talk about the ETFs that we use for factor exposure, as well as how you can apply our findings to your portfolio. We round-off today’s show by chatting about the latest bad financial advice. Tune in to hear more about our findings in this, our last episode of 2020.

Check out the new model portfolios: https://rationalreminder.ca/

Links From Today’s Episode:
Rational Reminder on iTunes — \itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
The Almanack of Naval Ravikant — https://www.navalmanack.com/
Episode with Dr. Brian Portnoy and Josh Brown — https://rationalreminder.ca/podcast/126
‘Crashing a 5.2 Trillion Dollar Party’ — https://www.bloombergquint.com/markets/crashing-a-5-2-trillion-party-etf-world-sees-record-new-firms
‘The Death of Diversification Has Been Greatly Exaggerated’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2998754
‘The Relationship Between Return and Market Value of Common Stocks’ — https://www.sciencedirect.com/science/article/abs/pii/0304405X81900180
Franco Modigliani — https://www.econlib.org/library/Enc/bios/Modigliani.html
Merton Miller — https://www.nobelprize.org/prizes/economic-sciences/1990/miller/biographical/
Episode with Marlene Lee — https://rationalreminder.ca/podcast/79
‘The Vanguard Total International Stock ETF: Right Idea, Wrong Implementation’ — https://seekingalpha.com/article/4387311-vanguard-total-international-stock-etf-right-idea-wrong-implementation



  1. Hey, I know this is extremely late but I have a question and was hoping someone could answer it. I am in college and studying computing science and in some of my classes, we discuss AI and models. In those classes we discuss factors and it sounds similar to the discussion here. I am wondering if it is similar because it kind of seems like it?

    If it is similar is it possible that this model is overfitted to historic data. The prediction rate of 95% of returns seems incredible, which in my classes we discuss the idea of having models which do excellently on training data due to added complexity (through additional factors) but fail when we attempt to apply them to new data points that the model was not trained on. So I was just wondering if this could be potentially the case here and if we should be hesitant of adding more complexity to the three-factor model just in case we are adding factors that fit historical data but do not generalize to new data points very well? Thank you so much!

  2. Who is the other guy who is just sitting in red jacket and not saying a thing. looks like a manager who isn't aware of project and doesn't care .

  3. Ben,in one of your papers you recommend that the US equity part of the portfolio consist of 1/3 total market,1/3 large value and 1/3 small value ETFs,but how would those ratios change if one were to use AVUS or the new DFA US ETFs instead of ITOT,VTI or a similar total stock market fund? Should the use of those more tailored ETFs prompt a lesser allocation to large value?

  4. I am not sure I understood the momentum premium. Is there any paper, podcast or else that could explain it a little more. By the way, thanks for the great advices!

  5. Can I invest with you guys at PWL Capital, specifically with you guys in Ottawa, with investible assets of 2.5 million? Or do you have a minimum investment amount higher than that?

  6. Love the Podcast and your channel Ben. I had a question regarding the ETF blend used in the Model Portfolio. Why use a Total US Market Cap Index like VUN in the model, when you can use a combination of a SP 500 Index + a Small Cap Value Index to gain exposure to Large Cap growth, Large Cap Value and Small Cap Value stocks and avoiding Small Cap Growth? I suspect the MER ratio will be a bit lower too using an SP 500 Index. Is it just to provide the diversification benefit?

  7. So for someone like me who’s invested in VGRO, it’s probably best to wait for vanguard or Ishares to release ETFs that can increase my exposure to small cap value stocks. I buy VGRO for the simplicity and I’m not really one to think about buying USD listed ETFs because of the currency transaction costs and tax withholdings

  8. The joint hypothesis problem sounds like an example of the Duhem-Quine thesis. According to that thesis, no scientific hypothesis can be tested in isolation. For example, Galileo's observation of moons around Jupiter depended on the hypothesis that telescopes faithfully represent reality and don't introduce moon-like artifacts.

  9. Thanks guys, my current "safe" portfolio consists of XUU as a combination of choices from both your PWL capital and Dan's Couch potato's model portfolio from 2017. XUU,VCN,XEF,XEC,TEC and some ZAG. As a current holder of XUU, what's the best way forward, do I sell all XUU and buy VUN or stay the course?

  10. So dumb question…if I currently hold something similar to last year's model portfolio in my TFSA (VCN, XUU, IUSV, IJS, VIU, VEE) do i just sell everything and buy the new portfolio? Am I likely to do this every year to some degree if there are changes and I want to follow Ben's model?

  11. Thanks. Why you only consider only the Avantis factor ETFs in your paper. What do you think about the Vanguard offering: VVAL, VBR, VSS?

  12. I want the hoodie. I never buy stuff like this but i love that hoodie. Plus you helped me ALOT

  13. Greeting from Romania and the UK. This is a very insightful podcast as always.
    Ben, I truly see you as a mentor. You really inspire me to do research and back my thinking with quality data.

    Best Wishes,

  14. What do you think of holding long dated call options on ETFs (SPY, for example) in as a way to get leverage within a TFSA?

  15. Since as Europeans we don't have access to small cap value ETFs in UCITS format, should we add additional tilts to small cap blend asset class or stick to the large + medium cap market return of Vanguard FTSE All World?

  16. Great research. Great video. Thanks so much fo all your good work.
    Any thoughts on x2 or x1,5 leveraged ETF?
    Any thoughts on good online brokers for international trade?

  17. I said it before and i will say it again, Cameron and Ben work so well together both vital parts of the podcast. Great episode,i can't really use the portfolios but i got great general knowledge.

  18. Greetings all the way from the Middle East and as always, thank you so much for the great value you deliver.

    I hold 20% in VBR, is it worth switching over to AVUV? Considering I have no tax implications if I made the switch.

  19. You are the best guys. I want to buy a sweatshirt from Turkey. but you don't send ship to Turkey. can you help me?

  20. Thanks guys, great content again. I have now relentlessly forwarded so many of your youtube links to friends and fam on the US West Coast, I feel I could qualify as an honorary rational reminder marketing intern. Keep it up.

  21. Great info–really like that you have provided an assembled portfolio with all risk factors… can you provide this for US investors?.

  22. Please differentiate US listed ETFs, since that kind of a big deal for many Canadian investors (in the actual PDF)!

  23. Are there US listed ETFs that a DIY investor can use to capture the profitability and investment factors?

  24. @10minutes I think he meant the opposite. That the 10 year yield is now lower the dividend of 60% of SP 500 companies.
    I think this is because the treasury yields are at historic lows. Sign of the times

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