wolf wrote: ↑
Fri Feb 14, 2020 10:18 am
Then I combined those three factor indexes and looked which stocks are listed in at least 2 out of those 3 factor indexes.
There is a critical error in taking this approach assuming you are interested in evaluating stocks by their specific factors, particularly if you are interested in smaller stocks. iShare/Blackrock is one of the biggest index fund managers on earth. They must buy shares of everything in their index, based upon the legal weighting system they use (often by market cap). So if a single owner owns 70% of the stock and isn't selling (like a founder), that means that the indexes have to fight over the last 30%. Often these are smaller companies, with low market caps. What happens if that company doesn't have enough shares to go around. What if literally they go to the well...er... market and it is dry? Now they are forcing the price up just due to a lack of available shares. So what they do is they "weight" or index the stocks based upon market cap minus insider ownership. Then they throw out anything without enough shares based upon a model of index size expectations.
If you assume insider ownership is a factor, then you are actually not participating in that factor. Even if you aren't convinced that is a factor, there is a good chance that stocks with large inside ownership have low index ownership and thus are more likely to be impacted by "irrational activist markets forces" over the buy and hold indexer. That is to say, from my investigations, they tend to be cheaper. You may decide they are higher risk too, since the index won't save your share price, but that is a personal judgement.
I believe there are other limits to using a indexer list, like "value" maybe just the stocks that are large cap (thus indexable) but below the 50%'tile regarding pe ratio or pb ratio. That may not actually be value, particularly once you throw out any small/microcap companies that the indexers can't easily index. Again, depending on your goal, this maybe desirable, but you have to know what you are getting into.
Lastly, keep in mind that A && !A (A and not A) can both be true in index land. For example:
https://www.ishares.com/us/products/239 ... growth-etf
https://www.ishares.com/us/products/239 ... -value-etf
both have JPM in the list of companies they include in their respective portfolios. Now maybe JPM is both growth and value. But if you think those are opposites, then it seems pretty clear something is wrong. This is due to the need to have huge companies in the index in order to get enough shares to make the index fund viable at scale.
I would be very careful using index fund company lists for anything. Use one of the screeners, be it the one vanguard offers or finviz or one of the many others that exist (I find https://fintel.io/screener
to be interesting in that they have an entire query language and like https://www.dripinvesting.org/tools/tools.asp
because it is in excel). If you are shooting for value, I would suggest going beyond just factors and examining the books and reading the earning call transcripts. Its a lot of work, but the risk of accepting the judgement of historical(*) factors, other people's opinions and industrial sized indexing systems is pretty high.
(*) Example: P/E using past 12 months earnings, not future earnings. Yes PEG might be good, but it is just an estimate. If you don't know how that estimate came to be, you are trusting other people's opinions.