In preparation for the launch of the Inspire Fidelis Multi-Factor ETF (NYSE: FDLS), Inspire Portfolio Manager, Tim Schwarzenberger, sat down with the FDLS index managers, Dan and Jake Wallick of Wallick Investments, to better understand their index methodology.
Wallick Investments, LLC, is a firm founded in 2005 that focuses on strategic moral investing. Wallick Investments is a nationally ranked registered investment advisory firm, specializing in separately managed accounts (SMA’s). Wallick designs and manages separate account portfolios using thoroughly researched proprietary processes that are repeatable, systematic, unemotional, and have stood the test of time.
Dan: Factor based investing is a quantitative, disciplined process for selecting stocks for inclusion in a portfolio based on pre-defined factors or characteristics that have shown evidence of adding alpha. Part of the reason why we are such evangelists for multi-factor investing is that the Russell 1000 Comprehensive Factor Index has been able to consistently outperform the cap-weighted Russell 1000 over the years.
Disclaimer: Alpha, is defined as the excess return on an investment relative to the return on a benchmark index.
Dan: Much of the research on factor-based investing has been published primarily in the Financial Analysts Journal and the Journal of Portfolio Management. On our website we have links to several of these articles submitted by authors from firms such as Research Affiliates, BNP Paribas, S&P Dow Jones, JP Morgan, Robecco Asset Management and Blackrock. I must also give significant credit to James O’Shaugnessey whose book “What Works on Wall Street” provided me with my first exposure to factor-based investing.
Dan: Most importantly we launched this index to respond well to God’s call to be good stewards. We have been running faith and factor-based strategies for a long time now and we want to help other investors, especially biblically responsible investors, do the same. This index and subsequent product launch allows more investors to access this strategy. It is our hope that the WI Fidelis Index can become a standard for benchmarking faith-based and factor-based equity performance.
Jake: We first start with the universe of securities listed on a major US stock exchange, and then narrow the list to those that: have a Positive Inspire Impact Score, are not Limited Partnerships or State-owned with a market cap of $250M+, and are not in the bottom 20% for Value, Growth, or Momentum (VGM). But we only pick from the ones that are in the top 60% for expected earnings surprise and for combined VGM. After the universe is narrowed from those criteria, percentile scores for each stock are calculated based on each sub-factor under the VGM categories. The final Fidelis score is the aggregate sum of each factor percentile score multiplied by its predetermined weight.
From the stocks within the top 20% for market capitalization, we choose 40 stocks with the highest Fidelis Scores, subject to sector and industry constraints. Finally, the next 60 stocks, regardless of market cap, with the highest Fidelis Score subject to the industry and sector constraints are then added to complete the list of constituent stocks.
Jake: Our factor weights are static and will not change to ensure we have a virtually equal weighting to each of the major factor categories – Value, Quality, and Momentum. Each subfactor and weight used is based on our confidence in its ability to add consistent excess risk adjusted return.
Dan: With on-going market volatility this is an important question. There are rules in place to ensure the Index maintains diversified sector and Industry exposure. The WI Fidelis Multi-Factor Index has exposure to 11-18 sectors and 40 or more industries. In addition to pre-defined factors, factor weights and sector and industry diversification rules, there is also a limit to larger cap exposure to between 40% and 75% and limit international exposure to no more than 35%. Together these well-defined controls help us avoid the emotional temptations to chase performance or the latest investment fad. Sector allocations are static with an allowance for the index to adjust only if a sector is more than 15% off the equally weighted S&P 500 allocations.
Disclaimer: Diversification does not ensure profits or prevent losses.
Jake: With 8 value factors, 16 quality factors and 7 momentum factors, we believe the Fidelis Multi Cap Multi Factor Index’s multi-dimension diversification is more comprehensive than the other multi-factor strategies offered by those we would consider peers.
Dan: Using a more comprehensive list of factors helps ensure better consistency. However, we only include factors with risk adjusted expectations above the overall market.
We believe over-diversification can happen when unrewarded factors are included in a portfolio. However, each of the factors that we are using have standalone characteristics that we think have the potential to lead to excess risk adjusted returns and we are confident of their additive properties as part of our index.
Dan: Since after each quarterly rebalance and reconstitution the index holdings are reset to what we believe to be the best combination of 100 faith-based and multi-factor securities, we expect turnover to be close to 100%. But actual turnover will be dependent upon how long a company can continue to hold a positive Inspire Impact Score and a high overall Fidelis Multi-Factor Score.
The Fidelis Multi-Factor ETF (FDLS) seeks to closely track the WI Fidelis Multi-Cap, Multi-Factor Index. With the ETF, investors will get diversified factor, sector, market cap, and geographic exposure, all in a single fund. Given its broad diversification, we believe FDLS could be considered as a standalone equity investment or a compelling complement to a diversified portfolio (e.g., 5-20% of global portfolio).
This launch provides a new option for investors and advisors looking to incorporate factor investing into their biblically aligned portfolios. For more information on the Inspire Fidelis Multi-Factor ETF, visit www.inspireetf.com/FDLS.
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Inspire ETFs are distributed by Foreside Financial Services LLC, Member FINRA. Investment advisory services offered through Inspire Investing, LLC, a Registered Investment Advisor with the SEC. Inspire and Foreside Financial Services LLC are not affiliated. Inspire Investing, LLC and Wallick Investments, LLC are not affiliated.
The Fund is not actively managed and the Adviser will not sell shares of an equity security due to current or projected underperformance of a security, industry or sector, unless that security is removed from the Index or the selling of shares of that security is otherwise required upon a rebalancing of the Index as addressed in the Index methodology.
The Fund invests its assets in securities with an Inspire Impact Score® of zero or higher which are screened for security’s alignment with biblical values and the positive impact the issuing company has on its customers, communities, workforce and the world. As a result of its strategy, the Fund's exclusion of securities of certain issuers for nonfinancial reasons may cause the Fund to forgo some market opportunities available to funds that do not use these criteria. The value of investments in larger companies may not rise as much as smaller companies, or larger companies may be unable to respond quickly to competitive challenges, such as changes in technology and consumer tastes.
The value of investments in larger companies may not rise as much as smaller companies, or larger companies may be unable to respond quickly to competitive challenges, such as changes in technology and consumer tastes.
The Fund is a new ETF with a limited history of operations for investors to evaluate.
