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Financial markets are once again trending higher, underpinned by the optimism of businesses and economies reopening. While there is no way of knowing how the Covid-19 pandemic will continue to play out, it seems for now that many investors are looking towards a recovery and eyeing potential investment opportunities.
Despite flashes of volatility that the market will likely continue to face in the coming months, the long-term growth trajectory of the stock market remains pointed up. For investors who feel that stocks aren’t as expensive as they were before, this is an opportune time to put money in the market and enjoy future capital gains.
Long-term investors can also take this opportunity now to dollar-cost average. Over the past years, they have been buying stocks at increasingly higher prices. But by buying more stocks now at lower prices, they can bring down their average cost of investing.
An index investing strategy using equity ETFs
Rather than spending the time to pick single stocks, one catch-all strategy is to invest into equity Exchange Traded Funds (ETFs). This collection of securities (in this case, stocks) often tracks an underlying index or benchmark and behaves just like ordinary stock.
And because equity ETFs comprise a basket of stocks, they are a popular and cost-effective means of gaining broad exposure to global equities — providing diversification and a good balance between risk and reward. Some notable equity ETFs include the SPDR S&P 500 ETF (SPY) and the SPDR Straits Times Index ETF.
This index investing strategy using equity ETFs offers many benefits. As a low cost, low maintenance option for investors looking to earn market returns, it also has the trading liquidity of equity — for example, it can be purchased on margin and sold short, and its trading price is updated throughout the day.
Is it possible to outperform the market with index investing?
As investors build their equity portfolios, some may wonder if there is a way to combine the traditional benefits of index investing with the opportunity to outperform the market.
It’s possible — if you use the right investment strategies.
One such approach is the use of smart beta. Smart beta is a hybrid of both passive investing and active investing strategies — but the best of both worlds. It utilises a set of rules to capture investment factors in a transparent manner. Factors are the specific characteristics that drive investment returns; common investment factors include liquidity, volatility, value, growth, size and momentum. In essence, smart beta seeks to provide exposure to the equity market and to one or more factors at a low cost.
Choosing the best factors
With dozens of factors in the market to choose from, how could you, as an investor, decide which to pick? Which factors are right for you and would you be able to pick the ones that can outperform the market?
One solution could be to rely on a wealth manager — for example, Syfe’s multi-factor smart beta approach for its new Equity100 portfolio means that it can deliver better risk-adjusted returns while keeping costs low. If you’re already familiar with this robo-advisor, you’ll be glad to note that the fees for Equity100 are the same as its existing portfolios, Syfe Global ARI and Syfe REIT+.
By buying into Syfe’s Equity100 portfolio, you will be invested in over 1,500 stocks from around the world. Microsoft, Amazon, Facebook, Procter & Gamble, Alibaba, and more are among some of the key stock holdings in the portfolio.
With Syfe’s Equity100 portfolio, investors gain exposure to 3 factors — growth, large-cap (size) and low-volatility. Based on extensive research and back-testing, Syfe’s investment team has selected these factors to generate better risk-adjusted returns for the Equity100 portfolio. In fact, it’s the optimal combination of these factors and a global diversification approach that helps to maximise portfolio efficiency and deliver the best possible risk-adjusted returns.
Additionally, by gaining exposure to multiple factors, investors can achieve greater diversification and become less reliant on any one factor to drive their returns. For example, if a factor underperforms in a particular time period, the steady returns of the other factors can still enable growth.
Syfe’s new Equity100 portfolio — the highlights
As mentioned above, Syfe’s new Equity100 offering focuses on global diversification and 3 factor tilts — growth, large cap (size) and low volatility to build an efficient and well-diversified equity portfolio. Here’s how these factors have been selected.
Growth stocks have been outperforming value stocks since 2010. In particular, this strong performance over the past 3 years can be attributed to the strong returns of technology stocks such as Facebook, Amazon, Apple, Netflix, and Alphabet (FAANG) .
In contrast, the value factor, historically seen as the factor-investing darling, has declined in performance. From 2010 to 2019 in fact, the Russell 1000 Growth index had risen 260% compared with the Russell 1000 Value index’s 139% gain.
As small and mid-cap stocks have been underperforming relative to their larger counterparts in recent years, Syfe has chosen a tilt towards larger stocks for its Equity100 portfolio.
The disparity widened during the recent March market sell-off, as small-cap stocks suffered much steeper losses than large-caps. This could be attributed to the fact that smaller companies have been much harder hit by the Covid-19 pandemic and the associated lockdowns than their larger peers.
To give the Equity100 a growth and large-cap tilt, the Equity100 portfolio includes the Invesco QQQ ETF, a widely traded ETF that tracks the Nasdaq 100 Index and is weighted towards large-cap tech stocks that tend to be fast-growing.
The lower the volatility, the smaller the swing in price. Stocks or portfolio of stocks with low volatility also tend to have higher returns than high volatility stocks. If this goes against the “high risk, high return” school of thought, numerous studies have actually found that lower-volatility stocks have historically generated better risk-adjusted returns over time.
This stability, combined with better risk-adjusted returns, is what many investors seek during this uncertain period.
Equity100’s low-volatility tilt is achieved using multiple sector ETFs such as Consumer Staples, Healthcare, Utilities and Materials. They have been chosen because they collectively generate the highest risk-adjusted returns for the lowest amount of volatility on a portfolio basis.
To provide international exposure from developed markets to emerging markets, the Equity100 portfolio includes broad-based ETFs such as the Invesco QQQ ETF, the iShares Core S&P 500 UCITS ETF (CSPX), the iShares Core S&P Mid Cap ETF (IJH), the iShares S&P 600 Small Cap ETF (IJR), the iShares MSCI EAFE ETF (EFA), and the iShares Core MSCI Emerging Markets ETF (IEMG). Check out more details of these ETFs here.
Dynamic factor selection
Of course, due to changing market cycles, the current factors could be less compelling over the longer term. To address this limitation, Syfe has implemented a dynamic factor selection and weighting methodology for its Equity100 portfolio.
For example, should large-cap stocks go out of favour over time, Syfe might reduce the exposure to this factor by using equal-weighted ETFs instead, which greatly increases the footprint of smaller stocks.
Syfe’s new Equity100 portfolio — performance to date
To date, Equity100’s 10-year average annual return stands at 13.4%*.
Here’s the current* asset allocation (*as of June 2020):
|Global Market Equities||Smart Beta|
|iShares Core S&P 500 UCITS ETF (CSPX)||14.60%||INVESCO QQQ TRUST SERIES 1||43.07%|
|ISHARES MSCI EAFE ETF||10.90%||CONSUMER STAPLES SPDR||18.92%|
|ISHARES CORE MSCI EMERGING MARKETS ETF||3.24%||UTILITIES SELECT SECTOR SPDR||1.51%|
|ISHARES CORE S&P MIDCAP ETF||0.95%||HEALTH CARE SELECT SECTOR||4.86%|
|ISHARES CORE S&P SMALL-CAP ETF||0.38%||MATERIALS SELECT SECTOR SPDR||1.57%|
If you’re keen to look at the backtested performance as well, here are the numbers:
|Equity100||S&P 500||MSCI World|
|Last 10 years||+13.4%||+13.2%||+9.1%|
*Source: Syfe internal backtested data, BlackRock, Invesco, Vanguard and StateStreet. Past returns are not a guarantee for future performance
From the tables above, it can be seen that the Equity100 portfolio’s combination of a global diversification strategy with smart beta results in it outperforming both the MSCI World index and S&P 500 index; as well as that of a pure-play smart beta strategy.
Better than DIY?
Maybe you want to be more hands on with your investments, and would like to implement a smart beta strategy in a Do-It-Yourself (DIY) manner.
Not saying it’s not impossible, but is it efficient?
Experienced investors can probably achieve Equity100’s blend of dynamic factor selection and portfolio optimisation, along with the diversification across both global markets and key factors that can drive outperformance.
However, Syfe’s ready-made Equity100 is also cost effective. As the portfolio holds 10 ETFs, individually replicating these ETFs could cost the DIY investor a pretty penny — those brokerage fees and minimum investment amounts all do add up.
Syfe, which offers a $0 brokerage charge with no minimum investment amount, is certainly a smart way for investors to enjoy the long-term better risk-adjusted returns of smart beta factors, while keeping their costs low.
Here’s a quick look at Syfe’s pricing:
How do I get started with Syfe’s Equity100 portfolio?
To get started, select the Equity100 portfolio and enter your details. Answer a few questions to help the platform assess your financial situation and risk appetite.
At the portfolio creation page, you can rename your portfolio, define your lump sum and/or monthly deposits. If you’re still unsure, Syfe has the option for you to talk to a financial expert. Investors can withdraw funds from their portfolio(s) at any time without any additional cost.
Start building your Equity100 portfolio with Syfe here.
Disclaimer: Past returns are not a guarantee for future performance. All forms of investments carry risks. Please ensure that you fully understand the risks and costs involved by reading the Risk Disclosure Statements.