bgsmith
My dear long-term readers certainly remember that I pay special attention to multi-factor equity exchange-traded funds. Today, I would like to assess yet another such vehicle, the Global X Adaptive U.S. Factor ETF (NYSEARCA:AUSF). I initiate coverage with a Hold rating, as I am frankly unimpressed by its total returns. I believe its inability to beat the iShares Core S&P 500 ETF (IVV) consistently in the past was most likely the consequence of the backward-looking approach of its underlying index. It did not fully protect it from steep drawdowns amid sell-offs as well. Besides, I was surprised by the fact that AUSF currently has more of a contrarian tilt as it almost entirely ignores the Magnificent Seven group and more growthier stocks, favoring less expensive, less volatile names.
My opinion is that AUSF does not have an edge over the macro-focused Invesco Russell 1000 Dynamic Multifactor ETF (OMFL), which I rated a Buy twice, with the most recent article presented in February. AUSF is not ahead of the actively managed BlackRock U.S. Equity Factor Rotation ETF (DYNF) either, a fund I have a Hold rating on. I would like to discuss all that in greater depth below in the note.
How does AUSF manage the portfolio?
According to the Global X website, the ETF is managed passively, with the Adaptive Wealth Strategies U.S. Factor Index being the foundation of its strategy. The factsheet says that the index:
… is designed to dynamically allocate across three sub-indices that provide exposure to U.S. equities that exhibit characteristics of one of three primary factors: value, momentum and low volatility. Each factor is represented by a subindex that is derived from the Solactive U.S. Large & Mid Cap Index, which is designed to measure the 1,000 largest companies, by free float market capitalization, that are exchange-listed in the United States.
The following details on the rebalancing can be found in the summary prospectus:
The Underlying Index is rebalanced quarterly. At each rebalance, the Underlying Index allocates weight to the three sub-indices based on the relative performance of each sub-index since the last rebalance of the Underlying Index. The Underlying Index is designed to always be fully allocated to at least two of the three sub-indices described above.
So in sum, this is a strategy that involves rotating in and out of value, momentum, and less volatile stocks quarterly, with the decision to overweight, underweight, or exclude the sub-indices based on their past returns, as we know from the index methodology summary.
AUSF performance was unappealing in the past
The critical reason for my skepticism is that AUSF’s returns were generally unimpressive in the past. At least, beating IVV was a task close to unachievable for it, even though a few bright spots do exist. For example, it weathered the 2022 bear market almost totally unscathed, with just a 78 bps decline.
However, while it did participate in both 2020 and 2023 bull parties, it was unable to eke out even a thinly stronger total return than IVV in both years. Moreover, in 2020, its worst month was March, as it underperformed the S&P 500 ETF by 10.7%, implying it was completely unprepared for the coronavirus sell-off. It showed some healthy dynamics in the months that followed, yet it still dismally trailed the bellwether ETF by 17.1% in the pandemic-torn year. So in sum, incepted in August 2018, the ETF beat IVV only in 2018 (by 2.4%) and 2022 (by 17.4%), with the annualized total return over the September 2018–February 2024 period being almost 1% lower. This is a significant disappointment for a multi-factor ETF that is supposed to tactically evolve to ‘adapt’ to the prevailing market narrative, ditching losers and boosting allocation to winners.
Yet this is just the tip of the iceberg. While AUSF looks somewhat bleak compared to IVV, its returns look even weaker when juxtaposed to OMFL’s.
| Portfolio | AUSF | IVV | OMFL |
| Initial Balance | $10,000 | $10,000 | $10,000 |
| Final Balance | $18,351 | $19,237 | $19,901 |
| CAGR | 11.67% | 12.63% | 13.33% |
| Stdev | 19.64% | 18.58% | 20.20% |
| Best Year | 27.45% | 31.25% | 35.58% |
| Worst Year | -10.63% | -18.16% | -13.97% |
| Max. Drawdown | -31.57% | -23.93% | -22.11% |
| Sharpe Ratio | 0.56 | 0.63 | 0.62 |
| Sortino Ratio | 0.82 | 0.95 | 1.04 |
| Market Correlation | 0.9 | 1 | 0.92 |
Data from Portfolio Visualizer. The period is September 2018–February 2024
And over the April 2019–February 2024 period (DYNF was incepted in March 2019), AUSF was also unable to beat either the selected peers or IVV.
| Portfolio | AUSF | DYNF | IVV | OMFL |
| Initial Balance | $10,000 | $10,000 | $10,000 | $10,000 |
| Final Balance | $18,538 | $19,199 | $19,470 | $19,492 |
| CAGR | 13.38% | 14.19% | 14.51% | 14.54% |
| Stdev | 19.76% | 18.63% | 18.49% | 20.39% |
| Best Year | 27.45% | 36.26% | 28.76% | 28.96% |
| Worst Year | -0.78% | -20.27% | -18.16% | -13.97% |
| Max. Drawdown | -31.57% | -25.91% | -23.93% | -22.11% |
| Sharpe Ratio | 0.64 | 0.7 | 0.72 | 0.67 |
| Sortino Ratio | 0.94 | 1.09 | 1.12 | 1.16 |
| Market Correlation | 0.89 | 0.99 | 1 | 0.92 |
Data from Portfolio Visualizer
What is AUSF’s current factor mix?
After dissecting the ETF’s 192-strong portfolio as of March 15, I can conclude that AUSF is currently representing a contrarian bet as it is light in growth stocks, with a relatively small footprint in mega-caps (28.3%), and has just one trillion-dollar league member in the basket, Apple (AAPL), with a microscopic weight of 6 bps. The overweening majority of holdings have beta coefficients below 1, as if the ETF is preparing for a sharp market correction. And perhaps the most interesting part here is how its factor mix has changed since December 2023. I have been following this vehicle since the end of 2023, so I have the necessary data. Let me share the following points:
- My calculations show that its weighted-average market cap stood at roughly $95 billion as of March 16, which represents a meaningful decline from $159.5 billion as of December 28. This is explainable as the portfolio has seen a thorough overhaul, with the previous holdings now accounting for less than 49% of the net assets. The reason for such a significant change was the February rebalancing of the underlying index.
- What is surprising though is that both the earnings yield and the share of holdings with a B- Quant Valuation rating or higher have changed insignificantly: a 6.57% EY now vs. 7% previously and 36.6% vs. 36.8%. For a large-cap portfolio, this is fairly considerable, indicative of a value tilt.
- The reason for the EY being so high is that AUSF remains enamored of financials, with a 23.2% allocation vs. approximately 26% previously. To give a bit more color, the financial sector stocks have the median EY at 8.3%, which is the highest result in the AUSF portfolio, followed by energy with 7.4% and materials with 7.39%.
- While in December the portfolio made a more GARP-ish impression, it is no longer valid as its ‘growth’ ingredient has disappeared. More specifically, the weighted-average revenue growth rate has fallen to 3.6% from 9.4%, with one of the reasons being pundits expecting lower sales going forward from 17% of the holdings, as my calculations based on the data from Seeking Alpha illustrated. Strangely, there were more such stocks in the portfolio in December, 18.3%. So what was the actual reason for the decline then? There were changes in portfolio composition, which, I surmise, were driven by index rebalancing and, consequently, the ETF rotating toward less volatile stocks.
- Here, the facts speak for themselves. I have identified 18 companies (7.2% weight) that had a 20%+ revenue growth rate and a beta coefficient above 1 (the median of 1.3 for the group). They were all removed. So while over 11% of the holdings had an over 20% revenue growth rate as of December, that share shrank to 89 bps. The weighted-average EPS growth rate has declined as well, now at just 5.3% vs. 8.2%.
- The portfolio-wise 24-month and 60-month beta coefficients have fallen significantly, now at 0.79 and 0.92 vs. 1.11 and 1.22. In this regard, I hypothesize that this equity mix is calibrated for a correction, as low-beta stocks tend to fare better than their more volatile counterparts during sell-offs.
- Quality characteristics are mostly fine, as illustrated by the share of holdings with a B- Quant Profitability grade of B- or higher, which stands at 84.5% (86.8% previously). The downside here is that, mostly because of financials, a low-ROA sector, the weighted-average figure is only 6.5% (8.9% previously).
Investor takeaway
In sum, passively managed AUSF has a multi-factor equity strategy that has not translated into consistent outperformance in the past. I find it fairly perplexing that AUSF emerged from the 2022 bear market almost unscathed but still delivered the worst maximum drawdown in the ETF group discussed above, as it was entirely unprepared for the pandemic sell-off.
While I am unimpressed by its results, which hardly justify a bullish thesis, I reckon there are not enough arguments for a Sell rating either, as AUSF’s strategy, past returns, and current factor mix are not that bad. That is to say, the golden mean of a Hold rating is to be chosen.
