AUSF ETF: Interesting multi-factor strategy but few compelling returns (NYSEARCA: AUSF) | Private Equity Weekly

My dear long-time readers certainly remember that I paid special attention to multi-factor stock exchange-traded funds. Today, I want to evaluate another such instrument, the Global X Adaptive U.S. Factor ETF (NYSE:EXP).I initiate a report Give it a Hold rating because, frankly, I’m not interested in its total returns. I don’t believe it can beat the iShares Core S&P 500 ETF (intravenous injection) has been consistent in the past, most likely as a result of its underlying index looking backwards. It also didn’t fully protect it from sharp declines during the sell-off. Additionally, I’m surprised that AUSF is currently more of a reverse tilt, as it almost completely ignores the Big Seven and more growth stocks in favor of lower-priced, less volatile stocks.

My point is that AUSF has no advantage More than the macro-focused Invesco Russell 1000 Dynamic Multi-Factor ETF (content), I gave it a “buy” rating twice, most recently in my article present In February. AUSF does not lead the actively managed BlackRock U.S. Equity Factor Rotation ETF (dynamic neural network) Or, I have a fund Maintain rating. I’d like to discuss all of this in more depth in the comments below.

How does AUSF manage its investment portfolio?

According to GlobalX website, this ETF is passively managed, and the Adaptive Wealth Strategy U.S. Factor Index is the basis of its strategy.this Overview Say index:

… designed to dynamically allocate three sub-indices that provide exposure to U.S. stocks that exhibit characteristics of one of three primary factors: value, momentum and low volatility. Each factor is represented by a sub-index derived from the Solactive U.S. Large-Cap Index, which measures the 1,000 largest companies listed on U.S. exchanges by free float market capitalization.

The following details about rebalancing can be found in the summary prospectus:

The underlying index is rebalanced quarterly. At each rebalancing, the underlying index assigns weights to the three sub-indices based on each sub-index’s relative performance since the last rebalancing. The underlying index aims to always be fully allocated to at least two of the three sub-indices mentioned above.

In summary, it’s a strategy that involves rotating between value, momentum, and less volatile stocks on a quarterly basis and making decisions about overweighting, underweighting, or excluding these sub-indexes based on past returns, as we learned from the index methodology generalize.

AUSF’s performance in the past has not been attractive

The key reason for my skepticism is that AUSF’s past returns have generally been unimpressive. At the very least, beating IVV is an almost impossible task for it, although it does have some bright spots. For example, it weathered the 2022 bear market virtually unscathed, falling just 78 basis points.

However, while it did participate in the 2020 and 2023 bull markets, it was unable to post slightly stronger total returns than IVV in both years. Additionally, the worst-performing month of 2020 was March, when it underperformed the S&P 500 ETFs by 10.7%, meaning it was completely unprepared for the coronavirus sell-off. It showed some healthy dynamics over the next few months, but it still trails the leading ETF by 17.1% in a pandemic year. All told, the ETF launched in August 2018 and only beat IVV in 2018 (up 2.4%) and 2022 (up 17.4%), with annualized total returns between September 2018 and February 2024 nearly lower. 1%. This is a major disappointment for multifactor ETFs, which should tactically evolve to “fit” the current market narrative, ditching the losers and increasing allocations to winners.

But this is just the tip of the iceberg. While AUSF looks a bit bleak compared to IVV, its returns look weaker compared to OMFL.

Click to enlarge

Data from portfolio visualization tools.The period is from September 2018 to February 2024

AUSF was also unable to beat selected peers or IVV between April 2019 and February 2024 (DYNF was established in March 2019).

Click to enlarge

Data from portfolio visualization tools

What is the current mix of factors at AUSF?

After dissecting the ETF’s 192-strong portfolio as of March 15, I can conclude that AUSF currently represents a contrarian bet, as it is less heavily weighted among growth stocks and less heavily among large-cap stocks. The share is relatively small (28.3%), with only one trillion-dollar alliance member Apple (AAPL) in the basket, with a micro weight of 6 basis points. The vast majority of holdings have betas below 1, as if the ETF is preparing for a sharp market correction. Perhaps the most interesting part here is how its mix of factors has changed since December 2023. I’ve been following this car since late 2023, so I have the necessary data. I share the following points:

1. My calculations show that its weighted average market capitalization as of March 16 was about $95 billion, down significantly from $159.5 billion as of December 28. This is explainable as the portfolio has been overhauled, with previous holdings now accounting for less than 49% of net assets. The reason for such a significant change was the rebalancing of the underlying index in February.
2. But surprisingly, earnings yield and the percentage of holdings with a B-Quant valuation rating or better have changed little: EY is now 6.57%, compared with 7%; EY is now at 36.6%, compared with 36.8%. For a large-cap portfolio, this is considerable and shows a value tilt.
3. The reason EY is so high is that AUSF remains keen on financials, with an allocation of 23.2% compared to about 26% previously. More specifically, financial stocks have a median EY of 8.3%, the highest result in the AUSF portfolio, followed by energy stocks (7.4%) and materials stocks (7.39%).
4. While the December portfolio gives a more GARP-like impression, it is no longer valid as its “growth” component has disappeared. More specifically, weighted average revenue growth has fallen from 9.4% to 3.6%, partly because experts expect 17% of the shares to see lower sales going forward, as my calculations based on Seeking Alpha data show. Oddly, the number of such stocks in the portfolio was higher in December, at 18.3%. So, what was the real reason for the decline at that time? There has been a change in portfolio composition, which I speculate is driven by index rebalancing, so the ETFs move toward less volatile stocks.
5. Here, the facts speak for themselves. I’ve identified 18 companies (weighted 7.2%) with revenue growth above 20% and betas above 1 (the median of the group is 1.3). They have all been removed. So while more than 11% of holdings had revenue growth of more than 20% through December, that ratio shrunk to 89 basis points. Weighted average earnings per share growth has also declined, now just 5.3% versus 8.2%.
6. The portfolio’s 24-month and 60-month betas have fallen significantly and are now 0.79 and 0.92 respectively, compared with 1.11 and 1.22 previously. In this regard, I assume that this mix of stocks is geared for correction, as low-beta stocks tend to perform better during sell-offs than more volatile stocks.
7. Quality characteristics are mostly good, as reflected by the 84.5% share of holdings with a B-Quant profitability rating of B- or higher (previously 86.8%). The downside here is that the weighted average is only 6.5% (previously 8.9%), mainly because financials is a low ROA industry.

Investor takeaways

All in all, passively managed AUSF has a multi-factor equity strategy that has not translated into sustained outperformance in the past. I find it rather puzzling that AUSF came out of the 2022 bear market virtually unscathed but still had the worst maximum drawdown among the aforementioned ETF groups because it was completely unprepared for the pandemic sell-off .

While I’m unimpressed with its results, which hardly justify a bullish thesis, I don’t think there’s enough reason to support a sell rating either, as AUSF’s strategy, past returns, and current combination of factors aren’t that bad. In other words, choose the golden mean of holding the rating.