Five Factor Investing with ETFs

Larger companies like Apple and Tesla make up a larger portion of the market compared to smaller companies, and these relative weights are reflected in a market capitalization weighted index fund. Letting the market dictate your portfolio weights has lots of advantages, but pushing the fundamental logic behind index investing one step further leads to the potential for significant improvements in portfolio construction.

Referenced in this video:

Timestamps:
0:00 Market Capitalization Weighted Index Fund Explained
1:00 The Efficient Market Hypothesis
3:25 Let’s Get Back to Basics
4:51 Capital Asset Pricing Model (CAPM)
6:40 Empirical Anomalies in the Market
8:56 Risk Premiums
12:30 What I do with my Own Money
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[BenFelixCSI]

Be aware of spam comments and replies. I will never ask you to text, email or call me in a YouTube comment. Please report those comments.

[lucky]

A financial social influencer that doesn't promote webull every two seconds...amazing.

[lanceareadbhar]

Ben - Read my paper to understand this more.

Me: *About to adjust my entire retirement strategy with a few clicks without doing any additional research* Good idea. Thanks Ben.

[tinyplaidninjas]

You know, fools spouting opinions about things they know nothing about are a dime a dozen. We call em Motley Fool. I always love how you back your conclusions with evidence that anyone can go out there and read for themselves and challenge, and sometimes I read that same evidence myself. Cheers for being a beacon of knowledge in a sea of horseshit

[Sederic]

Hi Ben! When you wrote this white paper back in December, I studied it very closely and decided to follow this allocation in my RRSP. I can't thank you enough for including a section on page 25 (Proposed Equity Model Portfolio) for tax efficiency in an RRSP. Without your hard work, this information would not be available to investors like me. This channel is a blessing for Canadian Investors. Cheers from BC!

[apothe]

Im just getting into investing. I've always loved science, I never realized you could be scientific with investing. Thanks for your hard work Ben, it's life changing

[rogerthornhill]

It does not get more researched and rational than you Ben. Its not just your empirical approach. I won’t lie your straight to camera delivery and forthright presence just enforce a certain feeling of honesty and integrity that many others who offer ‘advice’ on the same topics and on the same medium don’t go near matching. Bravo keep it up. Your videos are always thought provoking. And I always take something away from them. If that’s your goal your right on target.

[shaneb]

Most rookies look for a click bait “shocked face” video by some 19 year old that doesn’t have a clue. Ben is the real deal.

[Pancho]

I consistently go back to this video, its incredibly useful in explaining risk factors in an easy to understand way for a regular person.

[mod]

Dude you're absolutely awesome. Like for real. Thanks for everything you do. Your effort really helps understand these rather complicated topics and it improves life quality of whoever is watching as a result of it. Also the videos are very entertaining to me and I love your no nonesense approach while staring at me out of that grey void with the ocasional well picked graphs and animations. Greetings from Germany to you and your family. Please keep up the good work.

[canislobo]

Commenting so the YouTube algorithm knows I want to see more videos from smart finance people like Felix.

[TheoreticallyNo]

Finally we are starting to see some products available for individual investors. I’ve known about these factors for a long time (did a reading deep dive back around 2006) but there were few vehicles available. DFA is great, but really only accessible to those working with an advisor and often limited to those with a large portfolio.

One thing I would add is that if you add these factors you must be willing to tolerate returns that can differ on a year to year basis significantly from a market cap weighted portfolio.

[commadanteflet]

Hi Ben, my introduction to investing two years ago was to Vanguard's market cap weighted index funds. I really like the way you present yourself and feel like I'm going to need a month to digest this information. I'm planning on printing your paper today and keeping it in the work truck to read on my lunch breaks! Thank you for everything you are sharing!

[JMEUTEUW]

It’s great to watch a video without ads every 2 minutes

[jvm-tv]

The premium YouTube financial content. Can't believe I get such quality content for free. Thank you Ben 🙏

[tripham]

You’re just such an OG Ben. Been watching you for years. Been waiting for this video for years. Cheers bro. Appreciate your work a lot. Thank you for sharing your experience with us on YouTube.

[edenmacdonald]

Y'know, I totally agree with you that market cap index etfs are probably best for most investors, and were best for me at the very start of my investment journey, because they reduce the complexity of managing a portfolio. But I just wanna add some of my own POV as someone who at this point would be happy to move on to something more advanced even if it adds more complexity.

As a data scientist who genuinely enjoys this sort of thing but is relatively new to investing (<5 years), I'm not just happy to hear about the potential benefits of 5 factor investing, I'm also SO happy to discover *more stuff to learn about* in the investing world that might actually have good rationale behind it. I'm happiest when I'm learning new things—especially when those things involve probabilistic reasoning and coming up with algorithms or general principles for making smart decisions.

Investing was super fun to learn about at first. However, it quickly became boring as I realized pretty early on that index investing was gonna be the name of the game for me, for better or worse.

I have never stock picked, but I won't lie I sometimes look at stock pickers (or even algo traders) on social media and get envious because they have "more stuff" in their hobby to work on, whereas my strategy is really kinda boring. I've tried so many times to convince myself in good faith out of my bogleheady beliefs, just so that I'd have something to work on with my portfolio, but by and large the arguments for other approaches have just felt so unconvincing to me. :(

So, in lieu of some other investing project to work on, I've instead mainly turned my attention to my lifestyle and personal budget for the past few years. Y'know, altering my lifestyle and designing software to give me a monthly budget and savings rate is correlated with portfolio value, retirement projections, etc. That's been pretty cool and has given me a principled system for budgeting and maximizing my returns (e.g., taking advantage of time-in-market, investing more during bear markets and less during bulls based on clear rules rather than trying to time the market) while accounting for my personal values (e.g., enjoying my money while I still can, increasing my lifestyle spending over time so I feel like I'm always "moving up"). But most importantly, it's given me a fun project to work on!

However, that's also starting to get boring now as I'm running out of ways to tweak the algorithm or my lifestyle. I'm already basically happy with both, and further changes usually aren't really better at this point. Soooo...

I'm not jumping in to five factor just yet. But after watching your video I'm really looking forward to reading your whitepaper + doing my own lit review. If I find those convincing I will potentially change the weights I use to distribute my savings each paycheque thereby gradually changing my positions.

All of this to say, thanks for also producing this sort of content, for those of us who genuinely like investing as a hobby but are also really sympathetic to the rationale behind index investing and don't have any interest in gambling with stock picks or other nonsense. I realize it must be hard to strike that balance between keeping the message clear for people who just need something simple that works v.s. those of us who are going to enjoy thinking a bit more deeply about how to optimize, but I appreciate it a lot.

[igorx]

Thank you for making an updated version of the amazing 2019 video ("Small Cap and Value Stocks") that summarizes the relevant theory while introducing the concept of factors. I've been compiling a short list of your videos that I'd share with friends & family that are interested in learning how to invest (and also more generally plan for retirement and manage wealth), and this one is a great summary for the investment portion. And as you have mentioned many times, I'll still end up recommending only something similar to VT, which is sub-optimal, but easier to manage. That is, until we have an equally easy, single-ticket ETF with factor diversification. DFA and Avantis are looking promising.

Either way, understanding about factors (even when not tilting towards them) greatly helps in showing people how trying to pick individual stocks is a losers' game.

Your videos should be considered digital heritage. Thanks for all your work and PWL for supporting it.

[NoUseForMySoul]

Sir, you are a treasure to this community. I still have questions, especially considering reasonable prices for this exposure with the current ETFs available in Europe, but you video sums up about 8 weeks of research for me. The average TER of such factor ETFs is rather high, and these costs are a given compared to the expected average return premium. It's a weird, but familiar feeling to dive this deep into economics as a computer scientist, feels like data mining all over again. You really helped me a lot, simply because you sum up my own conclusions devoid of the noise to the right and left of the path. Thank you very much.

[BradReeve]

This is stellar, I was literally just having a bit of a binge through your previous videos, and this new video appeared as I refreshed at the end. This info couldn't have come at a better time, as I've recently been a bit overwhelmed with wanting to reorganise my allocation. I'm not hugely experienced but it's very difficult to discern good advice from bad when it comes to this stuff. Excellent info, and all impeccably referenced. A huge breath of fresh air!