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Exchange Traded Fund investors that are searching for a consistent long-term investment strategy to diversify their holdings can think about a system that aims to do exactly that: Winning by not losing.
In the new webcast Excellence Without Emotion: A Better Investment Process, New Age Alpha’s co-founder, chief investment officer and senior portfolio manager, explained that investors lose money when a stock is overvalued since market information isn’t precise, so humans often times impound incomplete and vague information into stock prices. As a result, companies are at risk of being unable to meet the growth implied by their stock values.
Over the long-term, steering clear of overvalued stocks can foster improved Alpha and magnified risk-adjusted returns. For example, since 2002, a portfolio of low human factor quintile investments fostered annualised returns of 14.7% and a sharpe ratio of 0.86. Whereas, a portfolio with high human factor quintile investments produced an annualised return of 10.7% and a sharpe ratio of 0.49.
The human factor distinguishes priced risks beta, Fama-French, momentum, style, size, other modeled risks, explained idiosyncratic risks and unexplained idiosyncratic risks.
This effort to steer clear of overvalued stocks also yields a uncorrelated source of returns. The human factor has no more than a 0.43 correlation in both directions with any of the nine common factors, with a high of +0.36 correlation to volatility and a low of -0.43 correlation to momentum and value. After balancing all nice factors, the human factor yielded 0.18% per month in alpha, and the synthesis of all nine factors only accounted for 39% of the return of the human factor.
Investors that want to keep clear of overvalued stocks can look at New Age Alpha’s new ETFs, AVDR US LargeCap Leading ETF (CBOE: AVDR) and AVDR US LargeCap ESG ETF (CBOE: AVDG). These ETFs provide an actuarial strategy with an uncorrelated source of return.
Starting with a familiar investment universe, the S&P 500, AVDR finds and strikes out the 450 companies that have the highest human factor score to produce a portfolio of 50 stocks that have the lowest human factor score.
Close to AVDR, AVDG seeks to outperform by steering clear of low-rated ESG companies that the firm suspect are most likely to disappoint matching or exceeding the growth implied by their stock prices. Starting with a familiar investment universe, the Refinitiv U.S. Total Return Index, AVDG employs negative screening to oust all but the highest-rated stocks and highest-rated ESG companies that have the lowest human factor to generate a basket of 50 highly-rated ESG stocks that have the capacity to outperform.
2 Awesome Actuarial ETFs Conclusion
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