[MrBlackhill]

In reviewing this puppy, the one thing I like about ZGQ is holdings are capped at 5%.

One thing you may not like is its average volume (8k for ZGQ vs 43k for XAW and price*volume of about $360k for ZGQ vs $1.3M for XAW). I think it's sad, I'm watching many solid ETFs with low volume.

 

[afulldeck]

One thing you may not like is its average volume (8k for ZGQ vs 43k for XAW and price*volume of about $360k for ZGQ vs $1.3M for XAW). I think it's sad, I'm watching many solid ETFs with low volume.

Yes. I was looking at those numbers. I haven't found any information (yet) pointing to why the volume is so low compared to its peers.

 

[fireseeker]

One thing you may not like is its average volume (8k for ZGQ vs 43k for XAW and price*volume of about $360k for ZGQ vs $1.3M for XAW). I think it's sad, I'm watching many solid ETFs with low volume.

I'm not sure volume from a major ETF provider is a concern these days.
An order placed between the bid/ask -- not right in the middle, but giving an edge to the liquidity provider -- will usually get filled by the market maker. If it doesn't, change your order price by a penny or two.
These transactions aren't always recorded in the market -- they might be filled in dark pools, for instance -- meaning liquidity is often better than volume reporting suggests.

 

[afulldeck]

An order placed between the bid/ask -- not right in the middle, but giving an edge to the liquidity provider -- will usually get filled by the market maker. If it doesn't, change your order price by a penny or two.
These transactions aren't always recorded in the market -- they might be filled in dark pools, for instance -- meaning liquidity is often better than volume reporting suggests.

Now that is an interesting tidbit.

 

[AltaRed]

An interesting ETF I had never looked at before. Not much traction though, $188M in AUM over 6 years since inception with a rather, in my opinion, high MER. Typically, I don't like 'boutique indices' though this one is just a twist on the All Country World Index ZGQ - BMO MSCI All Country World High Quality Index ETF | BMO Global Asset Management

Agreed that volume is not an issue if the market maker is present, and should be to keep Bid/Ask within reasonable proximity of NAV during low volume periods. Can tell if that is the case most of the time with Real Time Level 2 quotes.

 

[MrBlackhill]

Typically, I don't like 'boutique indices' though this one is just a twist on the All Country World Index

Exactly, it's just a single factor that MSCI added to its index and I trust MSCI. They have full documentation with more historical data on those kind of indices on their website. They also have full research reports about their factor indices.

I don't know how to calculate the effect of MER but if it's plain simple as compounding the MER to the CAGR then it's not an issue. -0.20% x +8% leads to +7.784% for XAW while -0.45% x +14% leads to +13.487% for ZGQ. And if it's just a subtraction instead of a compounding, then it's even better.

 

[james4beach]

I don't see any big problem with ZGQ, but it is a rather small fund with a low assets under management. It may not stick around long term because it hasn't been able to attract investors.

The main difference I see between them is the weighting in the US: ZGQ is 68% US while XAW is 58% US

The fund description has a bunch of fancy factor things going on, but the weight in the US may explain the difference in performance... so the outperformance of ZGQ doesn't excite me too much because I suspect it comes down to % exposure to US.

What happens when the US then enters a decade of underperformance? ZGQ would start underperforming, and then you would doubt your holding in it and feel bad that it has too much in the US, and then chase performance by going into XAW or something else which is even lighter in the US, probably.

At the end of the day it doesn't matter which of these foreign ETFs you choose, but I think you need to be ready to stick with it "no matter what", including when it starts underperforming. Personally I think XAW is better diversified, plus it has the lower MER.

 

[MrBlackhill]

The fund description has a bunch of fancy factor things going on, but the weight in the US may explain the difference in performance... so the outperformance of ZGQ doesn't excite me too much because I suspect it comes down to % exposure to US.

Well, the quality factor made it pick more weight on US but also on other countries, which allowed it to significantly outperform the index, so that means the factor did a good job to pick on more US.

And if you want to know what will happen when the US will underperform, well it's an ETF and it will adapt, and it will most likely adapt better than the index, again.

In the link below that I provided in a previous post, you see how the quality factor and the momentum factor have been outperformers in many contexts: in World ex US, in EM, in Europe, in UK, in Asia ex Japan, in Japan, in Australia, in China, in Brazil, etc. It also performed better on the YTD during this pandemic crash. Also note that Brazil and LATAM have negative 10-year and the quality factor also outperformed in that bear context.

Factors - Elements of Performance - MSCI

www.msci.com

That's like the actively managed DXG that I'm watching for quite a while now. They are working with only 20-25 holdings around the world and they manage to be well diversified and to average +24% CAGR on the last 3 years. They also barely crashed during the pandemic. Actually, XAW crashed the worst while ZGQ and DXG crashed the least.

I'm also not sure about the MER argument when the performance difference is more than 1pp CAGR. Actually, the difference between XAW and ZGQ is 6pp CAGR, which is huge. But that's since inception, I prefer the average rolling returns but both ETF are pretty young so we can only analyse on a 3-year window and ZGQ's average outperforms XAW's average by 3pp CAGR. It's also 3pp CAGR difference on the 1-year window. And it has higher lows in all cases.

I don't agree about sticking to a plan "no matter what". I think most of us will be investing in the stock market for more than 40 years. So many things can change. New products, new strategies, new market context. I agree that we shouldn't be changing strategy every single year based on our mood, but we must be aware of the evolution of the market and adapt. That may require reassessing our strategy every decade or maybe even every 5 years.

 

[james4beach]

I don't agree about sticking to a plan "no matter what". I think most of us will be investing in the stock market for more than 40 years. So many things can change. New products, new strategies, new market context. I agree that we shouldn't be changing strategy every single year based on our mood, but we must be aware of the evolution of the market and adapt. That may require reassessing our strategy every decade or maybe even every 5 years.

That's a good point. I agree with occasional repositioning (which I've done myself), but one also has to also strike a balance to make sure it doesn't became constantly chasing past returns. Any hot investment you pick today will inevitably go through a period of bad performance, and then one gets tempted by whatever looks hot at the time ... if one isn't careful, this becomes a story of "buy high, sell low".

 

[afulldeck]

That's like the actively managed DXG that I'm watching for quite a while now. They are working with only 20-25 holdings around the world and they manage to be well diversified and to average +24% CAGR on the last 3 years. They also barely crashed during the pandemic. Actually, XAW crashed the worst while ZGQ and DXG crashed the least.

DXG is an interesting find with such a small number of holdings and sectors (health, industrials, IT) I think you maybe watching a concentration boost. If your inclined to higher risk portfolio this might suit the bill. I like it since I see the holding are advancing with technology adoption improvements.

I don't agree about sticking to a plan "no matter what". I think most of us will be investing in the stock market for more than 40 years. So many things can change. New products, new strategies, new market context. I agree that we shouldn't be changing strategy every single year based on our mood, but we must be aware of the evolution of the market and adapt. That may require reassessing our strategy every decade or maybe even every 5 years.

This is a fair point. The world is dynamic why aren't we?

 

[john.cray]

For a more "apples to apples" comparison let's look at ZUG vs ZSP - it shows outperformance for the quality factor ETF.

I too wish the quality filter they use for ZGQ didn't result in such a heavy US weighting since that makes it a lot less of a "world" ETF but I also hope that this same filter would adapt the composition to a different country weight in a situation when the US does worse.

The history is short but I find the results impressive. In both comparisons I ran (the one above) and in ZGQ vs XAW I see: higher CAGR, about the same standard deviation (volatility), better worst year and much lower maximum drawdown.

The other thing worth mentioning is that the quality factor results in a much lower number of stocks holdings.

 

[MrBlackhill]

The weighting is quite different, I must admit.

Below, ACWI, then ACWI Quality, then ACWI Momentum. As of October.

Quality picked on tech, healthcare, consumer staples, US, Switzerland and Taiwan. It dropped financials big time, and it dropped consumer discretionary, materials, energy, utilities, REITs and Japan.

Momentum picked on tech, healthcare, consumer discretionary, China and... Canada. It dropped financials big time, and it dropped industrials, consumer staples and energy.

 

[james4beach]

Though these factors are very interesting (ZLB was interesting too), I still wonder about the problems created by straying from any "standard index" approach. The pain of underperformance will always be hanging over you.

Going with the dumb old standard index (like TSX Composite, or MSCI etc) makes it easier to forgive a period of underperformance. You say, we're just in a bad period but the very long history shows us that the index will bounce back.

The situation does not create much confusion or emotional turmoil... no need to constantly second guess your investment.

What happens when you go into some exotic factor ETF instead and it doesn't keep outperforming like you were hoping. Now you find yourself paying extra fees for something which, over many years, is no longer proving its worth. Maybe the original concept wasn't great. Maybe the fund manager is poorly executing the idea. Maybe the technique had a brief period of greatness (shining moment) before it fizzled out.

I suspect that returns will suffer if every 2 years or 5 years, you hop from one awesome-looking ETF to another. There will always be something that's hot today. Mutual fund investors are notorious for this kind of return-chasing behaviour and I suspect that ETF investors tend to do the same.

 

[AltaRed]

The more exotic (boutique) the ETF, the higher the fees seem to be. Also the more securities move in/out of that boutique index, the more phantom re-invested capital distributions one will likely have.

 

[john.cray]

Some more data points that I find.

Dan's article on quality factor: Understanding the Quality Factor | Canadian Couch Potato
In contrast to the Canadian versions above, comparing QUAL vs SPY shows pretty minor differences.
In the case of IQLG vs VT it is even worse - VT wins by a lot.
Histories are short because of the recent development of the quality factor.

 

[MrBlackhill]

In contrast to the Canadian versions above, comparing QUAL vs SPY shows pretty minor differences.
In the case of IQLG vs VT it is even worse - VT wins by a lot.

About those comparisons, I would argue that they are not based on the same index. QUAL is not a quality factor applied to S&P 500, it's a quality factor applied to MSCI USA index, and it's beating it. You could argue though that Vanguard's USA index is better that MSCI's USA index because QUAL is not outperforming VTI. Therefore, even basic indices are not equal.

IQLT is ex-US, so it should be compared to IXUS (IQLT outperformed IXUS).

Backtest Portfolio Asset Allocation

Analyze and view backtested portfolio returns, risk characteristics, standard deviation, annual returns and rolling returns

www.portfoliovisualizer.com

It is also true that not all quality factors are made equal, that's why I said I was trusting the quality factor provided by MSCI.

 

[Investor87]

For a more "apples to apples" comparison let's look at ZUG vs ZSP - it shows outperformance for the quality factor ETF.

I too wish the quality filter they use for ZGQ didn't result in such a heavy US weighting since that makes it a lot less of a "world" ETF but I also hope that this same filter would adapt the composition to a different country weight in a situation when the US does worse.

The history is short but I find the results impressive. In both comparisons I ran (the one above) and in ZGQ vs XAW I see: higher CAGR, about the same standard deviation (volatility), better worst year and much lower maximum drawdown.

The other thing worth mentioning is that the quality factor results in a much lower number of stocks holdings.

Hey guys, ETF investor here looking to gain insights. I have been using ETFs since mid 2010s and have used both XAW and ZGQ. I agree with John on this one, I like the lower number of stocks inside ZGQ's portfolio and the results are impressive.

Another thing that made me do the switch was how it performed in volatile times, where the quality factor really kicks in and protects you on the downside.

 

[dcris07]

Hey guys, ETF investor here looking to gain insights. I have been using ETFs since mid 2010s and have used both XAW and ZGQ. I agree with John on this one, I like the lower number of stocks inside ZGQ's portfolio and the results are impressive.

Another thing that made me do the switch was how it performed in volatile times, where the quality factor really kicks in and protects you on the downside.

Interesting fact to note the "Quality" factor has really shinned especially during the COVID sell off ZGQ and ZUQ ( BMO US Quality)helped up better than the broad markets and outperformed when markets started recovering.

 

[james4beach]

Interesting fact to note the "Quality" factor has really shinned especially during the COVID sell off ZGQ and ZUQ ( BMO US Quality)helped up better than the broad markets and outperformed when markets started recovering.

And now what if, as COVID fears wear off, the quality factor underperforms the benchmark indexes for the next 3 years. Would you still hang on?

Going with any index/ETF, you really have to "believe" in it strongly enough that you will hang on. Everything takes turns outperforming and underperforming. You'll never find an investment which constantly outperforms the alternatives.

So it's important to invest in something you strongly believe in, because you'll need to hang on when it starts doing badly. It WILL eventually start doing badly, I guarantee you that.

 

[MrBlackhill]

Well, yes, the question is : how much research documentation must you read, how much reports much you read, how much historical data much you analyse so that your belief in your investment fits your risk profile?

On another subject, I have a question for you guys.

BlackRock iShares and Vanguard have their all-equity bundles XEQT and VEQT. I see that they overweight in Canadian equities and I guess that's because those ETFs are sold to Canadians, but why? Why wouldn't I just buy ACWI (sold in USD) to simply have an all-country exposure bundle instead of their XEQT and VEQT? And why don't they have an equivalent ETF sold in Canada? They only have XAW and VXC which are both ex-Canada (but the difference is very slight as they only removed the 2% exposure to Canada)? So the only ETF sold in Canada which is all-country is ZGQ but that comes with a factor (which I like, but some people may be reluctant).

In the end, my question is linked the original subject. If we want exposure to an all-in-one ETF all-equity all-country, we don't have many options. If you buy separate ETFs, then your exposure is not index-adaptive, it's index-allocated.

For instance, instead of buying VEQT which overweights Canada, I'd just build my own bundle based on my preferences buying for example 40% VUN, 10% VCN, 10% VIU and 40% VEE or if I want to fit more like ACWI then I'd but 98% VXC and 2% VCN.

Anyways, that's why my ETF preference for all-in-one all-equity all-country is simply buying ZGQ.