Why I Switched to CAGE

Invariably, I'm going to get this question a lot as to why I'm selling XEQT and moving into CAGE, having been in XEQT since late 2020. Might as well make a quick post about it.

I hesitate on how to approach this post because a change can come off as bigger than it actually is. Easy to make a clout video called "Why I'm Now 100% CAGE" with a photo of me with an open mouth. LMAO.

CAGE is just another global ETF that implements factor tilts, which is of course something I learned about from Ben Felix videos and the Rational Reminder podcast a long time ago.

Factors are characteristics of stocks that have shown higher expected returns. Now I remember a post from @25andinvested that had a good early reaction. "But Kar, if you believe markets are fairly efficient, why would you be able to juice out higher returns?"

Great question, but similarly to why stocks have higher returns than bonds, it can make sense under this framework where you are making trade-offs. In other words, it makes sense for small cap and value stocks to have higher expected returns if they are riskier.

XEQT remains my main recommendation for most people.

In some of my recent posts, there's been replies from people that said that even after consuming my videos, it took a long time (even years) to fully embrace some of the logic behind it.

And we saw during the most recent drawdown how many people started questioning their investment in something as straightforward as XEQT. Now imagine holding a factor-tilted portfolio that's also underperforming XEQT during that same drawdown. That's a much harder hold.

When you throw in understanding factors in the mix, I wouldn't want anyone to question their investment when the long-term benefit might just be very small.

On the latest Rational Reminder podcast, the CIO of Avantis Investors, Eduardo, estimates a 1-2% premium, but that's to be taken with a grain of salt. If we're to be on the pessimistic side, it might not even be 1%. So why bother? Because even a small premium compounds, and the trade-off is one I'm comfortable with.

For a good starting point to learn about factor investing, I'd start with this video: https://www.youtube.com/watch?v=ViTnIebSzj4

But I would take the time to consume a lot of content on this topic before even considering a swap.

Here are more resources:
https://www.youtube.com/watch?v=jKWbW7Wgm0w
https://www.youtube.com/watch?v=zlexP0hIprg
https://www.youtube.com/watch?v=ukgE8oX-4lE

14K views

86 Comments

Mr Financial

@mr.financial · 4moEdited

I'm surprised to see the switch @karyungtom I would have thought you would do a 66/33 or 60/40 to start. That takes some guts.

I personally don't like jumping into brand new products without any track record. Avantis has some great US products like AVUV, however, every product should be looked at on its own merits, not based on the company behind it.

I listened to part of that podcast, but didn't like how much of an advertisement it was by them... None of the risks came up and even the premium should never have been mentioned... It's impossible to tell how certain factors will perform with the given over/under suggested. That was a salesmen tactic 🙄
When I hear only roses and sunshine, I get MORE skeptical of the company 😂

I know they needed to create awareness for the product. Overselling comes with some negative effects and it triggered me a bit. I get everyone needs to sell their service and why it's better. A more holistic approach would have sat well with me.

And I say yes, let's see that video with your open mouth thumbnail 😂

Fraser McGuire

@frasermcguire · 4mo

The people have spoken…

ETF Go

@etf.go · 4moEdited

I was part of the team that brought the first Smart Beta ETFs to Canada in 2006.

They were linked to the RAFI Fundamental Indexes $CRQ $CLU $CIE $CWO

Similar to DFA - Research Affiliates (RA) data showed that breaking the link of weighting companies based on price (market cap) provided the ability (not a guarantee) to generate the often sited ~2% outperformance over a full market cycle.

RA built their Indexes to weight and rebalance companies based on the companies’ ‘economic footprint’ as captured by: Sales, Revenue, Book Value and Dividends.

As Factor research progressed the RAFI approach could be seen as providing Value/SmCap tilts relative to MCap Indexes.

Watching all of the various Factor strategies develop through the years since - I believe any ‘outperformance’ is driven from a combination of TWO characteristics:

1. Factor Exposure
2. Rebalancing based on those factors

With Tech sector dominating leadership the past 10+ years the MCap Indexes have seen minimal disruption in their sector make up but it’s exactly when that leadership (overvalued companies being overweighted) does change that the alternate weighting methodology of Factor strategies can provide that extra ‘relative’ protection (lower concentration risk within the leadership group) which ultimately adds to the extra 1-2% potential advantage.

In fact - RA research showed indexes built on random non-price weighted inputs (# of employees, # of offices, # of telephones, etc) resulted in the same 1-2% advantage. That insight shows the value of Index rebalancing that often gets missed as companies want people to believe the ‘factor’ itself is what drives the value add.

Importantly people should understand that any/all Factor strategies will naturally have periods of over/under performance. It is rare for any Factor strategy to provide outperformance each and every year. Afterall - MCap ETFs are growth strategies and also do a very good job at capturing the shifting growth drivers over time.

But given the different return paths offered by different Factor strategies and the fact that most Factor strategies incorporates non-price based rebalance criteria - it makes sense to consider complementing Core MCap Index strategies with a preferred Factor strategy to capture the two Index/Rebalance methodologies.

Timing of Factors through the market cycle certainly isn’t easy but could potentially also be considered as shown in the snapshot provided by Fidelity. Again - research exists that suggests (if implemented well) rebalancing between MCap and Factors has the ability to provide improved risk adjusted returns.

All food for thought and some added context for people to consider (regardless of which Factor they choose to pursue). 😉👍

Angelo @a.n.gelo · 4mo

Thanks for sharing!
I saw they also released CASV. I'm curious as to how CAGE compares to a 90% VEQT/XEQT & 10% CASV split..

Ade O

@kingadey · 4mo

You have strong conviction, Kar! Though I wasn’t expecting a 100% switch so quickly, your research shows that you’ve been leaning toward factor-based investing if the right product were available.

Personally, I am apathetic toward anything outside market-cap-weighted, broad-based index funds, but I can see the appeal.

Happy investing, brother!

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