RAFI under all market conditions

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Justin
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RAFI under all market conditions

Post by Justin » Thu Sep 24, 2020 8:29 pm

Any long-term holders of a RAFI/fundamental-weighted ETF?

How do you find they perform under all four market conditions?

I have a significant parcel of a RAFI ETF and I'm wondering whether to roll it over into something based on market cap weighting. The reason being, it looks instinctively to have less volatility than those based on market cap, and I believe we want more volatility in PP.

I also want to know how it performs "at the edges" ie at the precise time the market is crashing.

Finally, I'm guessing there is quite a bit of rebalancing/churn that takes place around turbulence, so does this also affect returns?

Appreciate your thoughts.
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Kbg
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Re: RAFI under all market conditions

Post by Kbg » Fri Sep 25, 2020 12:05 am

Justin,

Someone could probably tell you this, but you will be way better off as an investor if you go here. https://www.portfoliovisualizer.com/ and click on the Backtest Portfolio link. Find out when your fund rebalances and compare, see what happens when markets are going up and down and compare. Nothing like doing your own homework to learn the subject matter and internalize it.

Off you go now, hit the books. It'll be good for you.
Justin
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Re: RAFI under all market conditions

Post by Justin » Fri Sep 25, 2020 1:39 am

Turns out it's better to not use a RAFI fund! Thanks!!
boglerdude
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Re: RAFI under all market conditions

Post by boglerdude » Fri Sep 25, 2020 3:54 am

Anything other than cap weight is active management. RAFI is Mr Arnotts opinion on what companies are worth, based on the equation he came up with.

How much do you think he and his staff take in in fees every year (srsly, id like to know)
Justin
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Re: RAFI under all market conditions

Post by Justin » Fri Sep 25, 2020 4:21 pm

Sure, but the formula doesn't change. It's not active management, it's smart beta. You could claim it was based on back testing but then there's an argument that weighting by market cap is also back-tested smart beta, albeit with only one variable.

Incidentally "equal weight" also loses out to market cap in PP.

So now I'm wondering whether a "market cap squared" ETF would overperform. Amplify the volatility, amplify the rebalancing opportunities.
boglerdude
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Re: RAFI under all market conditions

Post by boglerdude » Sat Sep 26, 2020 5:58 am

The formula is his personal opinion on how much of each stock to buy, instead of 1% of Apple, 1% of Joe's taco stand, etc which is what cap weight does.

The S&P 500 is also active management as they hand pick the stocks. The total international index does poorly because there's much less effort made to filter out obvious garbage (see The China Hustle)

Right about maximizing volatility. If I wasnt already leveraged by a mortgage Id be thinking harder about TQQQ
https://www.bogleheads.org/forum/viewto ... 0&t=288192
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